The Fragility of Income

Reading time: 5 minutes

I don’t know when the next recession will happen but I know it will. One of my current preoccupations is contemplating the risk that the state and individuals run by deriving their income from singular sectors and sources.

I am currently reading Antifragile: Things that Gain from Disorder by Nassim Nicholas Taleb. It’s a very stimulating read. It has certainly forced me to consider my own financial circumstances. This post is largely my take on a number of concepts Taleb describes, specifically antifragility and optionality. These are related concepts and I discuss them in more detail below particularly how they pertain to the question of income.

The rest of this post is written on the assumption that you the reader have a basic grasp of these concepts. If terms like antifragility, optionality and black swan are alien to you, take a minute to read my notes on Antifragile here before proceeding.

According to the Irish Central Statistics Office (CSO), the average industrial wage for a full time employee in Ireland (as of last year in the CSO Yearbook of Ireland) is €45,611. Let’s consider a given individual with an income of a nice round sum of €50,000. Let’s assume that all of this income is coming from one source. For argument’s sake, let’s say this person is employed by a Financial Services company. On the face of it, this person is in a “good” job with apparent good prospects. I believe this would be a reasonably common view of this individual’s situation and prospects.

However this income is inherently fragile, come the next economic shock, the probability of this person losing their job would be high, suddenly they could have an income of €0. Just like 2008, this could happen overnight.

A better alternative than the above single income source scenario would be to have many smaller independent sources of income. I will illustrate this graphically below.

Let’s start by visualising the individual’s income as not just €50,000 but ten units of €5,000. It is inherently fragile due to it being concentrated into one source.

Figure 1: Fragile Single Source Income

50k_one_source

Next let’s now assume that this same amount of income can be achieved from a variety of sources as per Figure 2 below. This is now a less fragile situation. It might even be considered antifragile although one cannot simply assume that multi-source implies antifragile.

Figure 2: Less Fragile Multi Source Income

50k_five_sources

You will probably have noted that simply taking one source and dividing by five is not realistic. Let’s instead look at a more realistic transition from fragility to antifragility and what that path might look like. Starting again from Figure 1 (which represents a position of fragility), Figure 3 shows what a less fragile state would look like. For argument’s sake, let’s assume that this represents an achievable reality in one year. The additional sources 2 and 3 are relatively small but are growing (green), the original Source 1 is static (grey).

Figure 3: Transitioning from Fragility

50k_two_new_sources

Over time, additional sources can be added, the picture will increasingly become a mixture of increasing and diminishing income sources. It can be reasonably stated that Figure 4 below represents something which is approaching robustness. Robustness implying that if any one of the below sources was to disappear overnight, then the situation would not be dire. Even if the €50,000 was to disappear than there would still be a total of €24,640 available. The removal of Source 1 would be a materially negative event but not terminal. Figure 4 also represents a better alternative than the scenario of the single source fragile state that we began from (Figure 1).

Figure 4: Approaching Robustness

50k_four_new_sources

Moving the dial forward again, Figure 5 now represents robustness, taking any one source out of the picture will not have a materially adverse effect on the general income picture. Even taking the largest two sources out of the picture would leave a healthy €36,760. You will also note that Source 3 has now begun to decline from where it was. Having many income sources will inevitably mean that some are growing and some are diminishing. This is expected and optimal. The purpose here is to have enough options that if one really explodes and goes through the roof, then you will have skin in the game and benefit massively. Alternatively, if one income source diminishes significantly or disappears entirely, it will not have a disproportionate impact. The more income sources available, the greater the absolute difference for each source from the previous snapshot. This volatility is welcome and valuable. It is something to be sought and embraced. It is both a warning signal and an indicator of opportunity.

Figure 5: Achieving Robustness

50k_seven_new_sources_Robustness

Given the fact that there are now seven independent income sources in play, optionality has increased significantly. Having several options provides limited downside and unlimited upside. Not only is this scenario a better defense against the removal of particular income sources, there is a better opportunity of benefiting asymmetrically from positive black swans. Let’s now introduce a positive black swan, you can see that Source 5 in Figure 6 below has increased by over five times from the last snapshot in Figure 5 from €13,446 to €70,837. This clearly demonstrates how due to the increased number and variety of income sources, the better an individual can benefit from unexpected upside. The rest of the sources are still in a slowly increasing or decreasing state.

Figure 6: Positive Black Swan

50k_seven_new_sources_+BlackSwan

Let’s now take our income picture and throw 2008 at it. 2008 was a classic black swan as few people knew how destructive the crash would be or whether there would even be one in the first place. Under these conditions, one would expect a general negative picture.  Looking at Figure 7, there are some significant decreases amongst most of the sources. However because of optionality, there are some income sources which have increased in these conditions. In every recession, there are counter cyclical enterprises which benefit or parts of the economy that are sheltered from an economic storm. Note that the original Source 1 has now gone to zero, Sources 3 and 4 have approximately halved with Source 6 about a quarter of what it was. Despite the significant destruction of income, the overall picture is still positive.

Figure 7: Next Recession (Negative Black Swan)

50k_seven_new_sources_next_recession

It is unrealistic to assume that there will be a positive black swan event before the next recession so let’s default source 5 back to the level shown in Figure 5. Even after the removal of the positive Black Swan impact on Source 5, there is still a grand total of €55,327 being generated from six sources in Figure 8. This is better than the initial situation at the start with one source generating €50,000 which in the meantime has gone to zero.

Figure 8: Next Recession (Remove Positive Black Swan Event)

50k_seven_new_sources_next_recession_less_+_black_swan

While the above numbers and description of the transition from fragile to antifragile are entirely fictional, it clearly demonstrates the stark contrast between having a single income source and having multiple income sources. The latter providing optionality and thus antifragility. The antifragility being the result of a net positive outcome from a large dose of volatility which in most scenarios would be viewed as a negative event yielding negative consequences.

Assuming that there is a sufficient diversity to the above sources, the probability of them all going to zero at the same time due to the same event is much lower than the odds of any given source being adversely effected. It should also be noted that the amount of income derived from a given source or its recent growth has no bearing on whether it is likely to go to zero or not.

Furthermore the general antifragility of the individual’s income situation is undermined where the income sources are derived from the same sector or have inbuilt dependencies on each other or indeed one general common dependency.

In closing, I believe that the establishment of an antifragile income situation is advantageous and indeed necessary in today’s world.

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Antifragile Notes & Terminology

Reading Time: 1 minute
The purpose of this post is to act as a reference point and primer for the topics and terminology used in Antifragile: Things that Gain from Disorder by Nicholas Nassim Taleb.
I will add to this post over time as I write on these topics in more detail.
The Triad
Taleb describes Fragility, Robustness and Anti-Fragility as the Triad. I like to think about them as follows. Imagine holding a glass in your hand, you drop it from several metres to a concrete floor.
  • A fragile glass breaks upon on impact
  • A robust glass does not break upon on impact
  • An antifragile glass is enhanced by the impact. It is now a better glass.
Optionality
Optionality can be defined as the ability to asymmetrically benefit from a given set of circumstances. I like to consider as the difference between an a la carte and a prix fix menu. The a la carte provides options for each course. Perhaps you are not sure whether you want dessert, no need to make your mind up until you have to whereas a prix fix requires a single decision upfront with subsequent less flexibility.
Black Swans
A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict . It can be positive or negative. Using optionality to expose yourself to positive black swans is advantageous. Achieving antifragility will ensure that in the event of a negative black swan you can still benefit from it.
Related Posts:

The Power of Mission

Reading time: 4 minutes

Mission motivates us. It gets us out of bed in the morning.

Mission can take many forms. It can be related to your job, your sport or your family and much more besides.

It could be making millions or helping those who have fallen on hard times.

People consumed by mission do more. Achieve more. Go further.

If you don’t have a mission, then ensuring you are moving in the right direction is pot luck. A mission does not dictate the specifics of what you are doing right now, tomorrow or the day after. However, everything you are doing or commencing should be aligned to your mission. If it’s not, then how can you can make your mission a reality?

I discussed an approach to undertaking lofty ambitions in my last post Stars & Cloud Theory, I believe that the pursuit of the stars or even the clouds is impossible without a clear mission.

A mission keeps you going when you’re having a bad day. It can be considered your north star that leads you forward. A mission is your backbone. It is what you turn to when you are unsure what step to take. With a clear mission, you have a context and background to frame every choice you make. An apparent uncertainty is superceded by clarity of thought, providing the discipline and motivation to execute.

So what does a mission look like?

A mission is strategic. Lest anyone conflate the terms “mission” and “plan”, a mission is not tied to any one outcome or event. It does not have to be timebound, although it can be finite. It can span years or even a lifetime. On a similar vein, a goal is something which is very specific and has an associated deadline, whereas a mission allows failures to occur without the end game being jeopardised. A mission must align to your values. There is no point in having a mission to emulate Gordon Gekko while believing that global wealth redistribution is necessary.

Here are some examples that come to mind when I think of “mission”:

  • Establishing a colony on Mars – Elon Musk
  • “Knocking Liverpool off their perch” and dominating English Soccer – Alex Ferguson & Man Utd
  • Advocating and working on behalf of the poor and the misfortunate – Fr. Peter McVerry
  • Being a loving father/mother – Various

I like the word “mission” because it imbues a sense of action and urgency. When I hear the word mission, imagery of astronauts in space or soldiers on a battle field is evoked. Too often, particularly in the business world, “mission” is followed by “statement”, this then leads to empty sloganeering to satisfy some corporate “About” page on a website. These empty words may be referred to as a reference point but they should not be construed as “the mission”.

A mission works best if it is unambiguous and not limiting:

  • “Establish a colony on Mars” is specific but not to the extent that it pre-determines what a colony represents or how it should be achieved.
  •  If the mission is to “defeat the enemy” then there will always be a new enemy so you will never rest on your laurels.
  • If the mission is to “cure cancer”, then your mission is not complete until every form of cancer is eradicated, providing a consistent focus to your work.

Having a mission implies having systems to execute your mission, I will expand on developing and executing various systems in future posts. One such system I have described previously that you might find useful is how I prevent distractions during the workday.

Although you should be clear on your mission at all times, it doesn’t need to be immutable. You can always change your mission and re-focus. While a change in mission is necessary and sometimes unavoidable, it should be done as quickly as possible. Any ambiguity makes every decision harder.

Challenging yourself and the mission that you have is a healthy and useful exercise. Many of us suffer from confirmation bias. That being, we constantly seek more and more reasons why we are right. However it only takes one example to prove us wrong.

If you are afraid or worried that your world will be turned upside down by having one example contradict your world view, then you need more challenge in your life. No one can tell you what your mission should be. By necessity, it must be personal to you but you should be open to road testing it, sharing it and welcoming feedback from those closest to you. As I opened with, it needs to excite and energise you. Uncertainty is natural, particularly about something so significant but that uncertainty should only be temporary and not allowed to linger. Otherwise, a period of stasis will ensue.

Any highly functioning, high performing team that I have been part of has had a clear mission. Everyone was on the same page singing from the same hymn sheet. It is not possible for a group of people to operate together at their peak without a clarity of purpose and a mission binding them. Without a common, shared and consistently understood mission, their associated actions will not be made in a consistent mutually beneficial fashion.

My current stance on whether you should have a single mission or multiple missions is that you should only have one. Having more than one mission undermines your clarity of purpose. One cannot be all things to all people.

Some people may insist that they can have one personal mission and one professional mission and many do. In the short term, this is contradictory. In the long term, this is destructive. Say you want to be the best father in the world to your children (personal mission) and you want to be the best CEO in the world of the multi-billion dollar business you run (professional mission), clearly there is a contradiction. Inevitably, sacrifices must be made in pursuit of your mission. It boils down to personal decisions and priorities. Having differing and potentially divergent personal and professional missions will grate away at you. It will wear you down. A personal and professional mission symbiosis is optimal.

So what is your mission?

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Stars & Clouds Theory

Reading Time: 5 minutes

Who wants to be ordinary? Everyone wants to make their dreams come through, right?

Most people set goals or have dreams that they would like to achieve. However, many people will fall short. An antidote to this scenario of likely disappointment is to accept this probable reality of not realising your dreams. Instead change the trajectory and have bigger, loftier goals.

If you aim for the stars but fail and end up somewhere in the clouds, you will be far better off than had you never left the ground in the first place. The rationale here is that by setting a distant ambitious goal and working hard to pursue it, even if you never achieve it, you will have achieved a lot. In essence, half of a lot is much better than a lot of a little.

Say you want to run a marathon in under five hours, why not train and target running it in under four hours? You can now have an in built margin of safety in your goal. There are many other examples that this technique can be applied to, namely examinations, weightlifting, writing. Effectively, anything which can be quantified is well suited to the use of this technique.

Simply by setting an ambitious, possibly very ambitious goal, your thought process and behaviours will orient towards making it a reality. You will already have made progress because you will have primed your expectations for what success looks like. This aggressive pursuit of your goals allows your thought process to cultivate the steps you need to take to achieve them.

We all have an inherent “negativity bias” hard coded into our DNA stemming from our days as hunter-gatherers. Our ancestors were constantly aware of threats to their survival and held back resources and energy in case of an imminent attack:

“To keep our ancestors alive Mother Nature evolved a brain that routinely tricked them into making three mistakes: overestimating threats, underestimating opportunities and underestimating resources (for dealing with threats and fulfilling opportunities)” – Rick Hanson

To combat this “negativity bias”, we must challenge ourselves. I’ve wrote previously about Peter Thiel and how he thinks here. One of my favourite quotes of his is:

“How can you achieve in six months that which would otherwise take ten years?”

The above quote perfectly captures the mindset that I’m trying to describe in this post. This kind of questioning forces you to come up with a plan of action and means of realising your goal.

In some ways, this technique can be thought of as a reverse Parkinson’s Law. Parkinson’s Law states that work expands to fill the time. What I am proposing here is to stretch your goal which then effectively compresses the time available to achieve what you might otherwise have done. By expanding your horizon and perception of what you think you can do, you are more likely to get more done and get closer to whatever starry vision you have.

This approach is not suggesting that you will fail to achieve your newly created lofty ambition. But in the case that you do not achieve it, you will have “failed better” and end up ahead of where you might otherwise have got to and in a quicker time frame than you thought possible.

There are some potential negative side effects to this approach. If you use this technique repeatedly and you are continually failing to meet your goals (albeit still “failing better”), morale may diminish and feelings of disappointment may manifest themselves. Feeling like a failure is never pleasant so I suggest using the stars and clouds strategic approach as described above in tandem with a short term tactical approach which I’m going to refer as my “Ground Game” (just to keep my analogy going…:)).

To illustrate the differing strategic and tactical approaches, here’s an example:

  • Star Goal: In the next year, I want to write a book. To do that, I intend on writing a blog post every week to develop my writing style and create content which can be adapted into a book.
  • Ground Game: In the short term, I may get distracted or lose motivation. To counter this possibility, all I’m focused on in a given week is writing my next blog post. If that is proving difficult to accomplish, my focus turns to writing just one paragraph (or even one sentence if it’s a really tough week!).
  • Possible Cloud Outcome: In the instance that I do not write a blog post every week, every post I do write will bring me closer to my lofty goal.

My general reasoning is that you need to have a really big stretch goal in order to focus your worldview and provide a target that your effort is oriented to. On this journey, there needs to be tangible achievements and short term tactics in order to achieve it. Every post I complete and publish acts as a positive feedback loop which then further makes my goal achievable and creates momentum.

Often people will use phrases like “I’d love to…this” or “I really want to do… that”, this phraseology always irritates me. I have no problem with people expressing their wishes and desires but time waits for no one. You need to be getting after it if you want to make things happen. Very few people actually go to the trouble of trying to carve a clearly defined path to making their wishes come true. I sincerely believe that just the act of starting your journey towards your goal separates you from many other people.

Often when faced with a daunting goal, we can succumb to playing a game of “Here’s why it won’t work”. If you find yourself slipping into this train of thought, change the “I can’t do it” into “If I were to do X by a particular time, then what are the actions or tasks I need to do now to make it happen?”

Allowing oneself to dream and plot a path to a faraway goal is a very positive experience. It provides the motivation and encouragement to foster the discipline to do the hard work and maintain progress. Doing that initial ideation and creative thought and the development of the why and the purpose behind the goal, it becomes easier to do the grunt work.

So in summary, if you aimed for the stars but only got as far as the clouds, rest assured you are still miles above everyone else. By having higher standards and holding yourself to them, you will have achieved massive self development and much more besides.

In closing, I wouldn’t consider this post a done deal, it’s a concept I enjoy thinking about and I hope to return to this topic and riff on it further in future posts.

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How to Hedge Against Uncertainty

Reading Time: 4 minutes

Trump, Brexit, the rise of the far right, sometimes it feels that there is no end to the current uncertainty. In the current climate, how does one set themselves up to mitigate this uncertainty?

I don’t pretend for a moment to have all of the answers but I will attempt in this post to promote thought on this topic and to identify the requisite characteristics to hedge effectively against uncertainty.

Agility
My use of the word agility here is intended to capture the rate at which you can move into a different career. Let’s say you’re a blocklayer and making a decent wedge. All of a sudden, there’s a property crash and your livelihood is effectively decimated. How quickly can you transition to a new career?

Another way of looking at this is, what transferable skills do you possess which you can use to transition to a new career? The above use of a blocklayer is not intended to limit this analogy to only manual labour. Currently there are many “desk jobs” under threat from automation, artificial intelligence and economic change.

It would be prudent to identify what your transferable skills are and how they might be useful in pursuing a new path. If you find that you don’t have many transferable skills, can you take steps to develop some?

Frugality
Are you leading a debt fuelled lifestyle? Do you really need to splurge on pay day on that needless item? Have you got a rainy day fund? The ability to live off scraps ensures that in the instance of a recession, you will be relatively less worse off then a colleague who is in up to their eyes in debt. When your existing career goes kaput the ability to live off less will ensure that you have:
a. Some savings put aside.
b. More time to live off those savings while you develop an alternative income source.

Here’s a piece I wrote on how to save more: Show Me The Money

Resilience
Faced with a negative event, how quickly can you pick yourself off the floor and get back on your feet? What are your thought processes when confronted with a setback? Do you spend time blaming external events and looking for sympathy or are you already formulating a plan to move forward?

Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.” – Samuel Beckett

Everyone has set backs, it’s those of us who recover quickest generally achieve more.

Have a Back-Up Plan
I’ve currently reading The Start-up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career by Reid Hoffman and Ben Casnocha.
In it, there is a process called “Plan ABZ”. It’s a simple yet powerful way of having multiple options available to you regardless of what situation you find yourself in. It’s written focusing on career topics but stems from the start up world and can be easily re-used in many other walks of life.

Plan ABZ

  • Plan A: This is what you are doing right now. You make minor adjustments and iterate regularly.
  • Plan B: This is in the same general ballpark as Plan A. It’s what you pivot to when you need to change your goal or your means to achieve it. Pivoting can occur because Plan A is not working or because you’ve just discovered a new opportunity and Plan B is now more promising.
  • Plan Z: This is your fallback, effectively your lifeboat. The certainty of a reliable, stable Plan Z allows you to take on more risk and uncertainty in A and B.

The benefit of this method that no matter what stage of life you are at, you will always be planning and adapting. This method is thus not a time specific event but rather a habitual process.

Another variation on the Plan ABZ theme is the phrase “Two is one and one is none”. This phrase stems from military circles. It means that if you are out on a mission and you bring one of anything, then effectively you have no alternative when that item, tool or weapon breaks or has been mislaid. Having two of everything will ensure that when your knife breaks, you have another ready to go and the mission will not be jeopardised.

Bringing this back to civilian affairs and specifically in a career sense, most people have one source of income. If that disappears or is greatly reduced, they are significantly adversely effected. Writing these words has made me think about this more, I hope it has the same effect on you.

In summary, a combination of agility, frugality, resilience and the presence of a back up plan will ensure that no matter what scenario you find yourself in, you will be able to get your life back on track.

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The 3 Commencement Speeches I Keep Going Back To

Reading Time: 4 minutes

Watching Time: 38 minutes

There are times when we all need some motivation and inspiration, one of my favourite ways of replenishing motivational supplies is to watch commencement speeches by various folks. Below are three of my favourites which I’ve watched on countless occasions. I’ve written some thoughts and commentary about what resonates most with me from these speeches at the end. I hope you enjoy these and let me know if you have any recommendations to share.

 
Neil Gaiman @ University of the Arts
Steve Jobs @ Stanford
(Jobs starts speaking at 7:40)

 
Winston Churchill @ Harrow

 
Neil Gaiman @ University of the Arts

This is one of the best motivational speeches I’ve ever listened to. The “You should enjoy it” piece @15:09 is a real hair-standing-on-the-back-of-your-neck moment.

It’s such an entertaining speech and Gaiman’s use of humour to emphasise his points is excellent. My favourite part of his speech is @13:00 where he explains how he bluffed his way into a job by stating how he had worked for various media outlets. When he was established, he insisted on going back and actually writing an article for each of the magazines. He didn’t lie, he was just chronologically challenged!  This concept of “future truths” is something which you hear various successful people bring up often. It’s an alternative and really instructive way of looking at the world and then finding a path to realise your vision of the future.

@14:00 , the “two out of three will do” concept of doing great work, being easy to get along with and getting the work done on time definitely holds up in the real world!

There are also so many excellent quotes in this speech but here are two which I particularly like:
  • “The things I’ve done the best are the things I was least certain about.” This is a powerful statement. Too often, we come up with reasons why things will fail rather than reasons why they will succeed.
  • “Be wise, because the world needs more wisdom. And if you cannot be wise, pretend to be someone who is and behave like they would.” Similar to the above “future truths” reference, sometimes you need to fake it until you make it.

Steve Jobs @ Stanford

Jobs describes how he dropped out of college, followed his curiosities  by dropping into various classes which he would otherwise not have been exposed to. He goes on to describe various parts of his life and offers many takeaways.

“You can’t connect the dots looking forward, you can only connect them looking backwards… Trust in your gut believing that the dots will connect in the future giving you the confidence to follow your heart even when it leads you off the well worn path. That will make all the difference.”

When describing his departure from Apple, he explains how he turned a negative into a positive and how having something and someone he loved allowed him to get past this difficult event. “Do what you believe is great work. The only way to do that is to do what you love. If you haven’t found it yet, keep looking. And don’t settle.”

“If you live every day like it’s your last, then someone you’re going to be right”. Jobs explains how he looks in the mirror every morning and asks himself “If today was going to be my last day, would I want to do what I am going to do today?” When the answer is no for too many days in a row, he knows he must change something. “Remembering I’ll be dead soon is the most important tool I’ve ever encountered in life.”

@19:30, he offers some brilliant life advice:
  • “Don’t waste your time living someone else’s life.”
  • “Don’t be trapped by dogma, which is living with the results of other people’s thinking”
  • “Don’t let the noise of other people’s opinions drown out your own inner voice”
  • “Have the courage to follow your heart and inituition , they somehow already know what you truly want to become. Everything else is secondary.”
Finally he closes with what he considers his personal maxim:
  • “Stay hungary. Stay foolish.”

Winston Churchill @ Harrow

I really love the sound of Churchill’s voice. He could read the phonebook and I’d listen to it. While this is a relatively short audio clip, it clearly captures his mastery as a speaker and his use of various oratorical devices. I like his emphasis on the use of particular words and the meaning they convey. Where the song he refers to uses “dark”, he prefers “stern”. This is a subtle but significant change of emphasis. Dark sounds like there is no way out of it. Stern sounds like “It’s shit but we’ll get through it. This speech was made in 1941 when World War II was not halfway to completion. This alternate choice of word gives an insight into his mindset and is testament to his unerring belief.

@2:02, this clip contains one of his most famous quotes: “Never give in, never give in, never, never, never. In nothing, great or small, large or petty, never give in except to convictions of honour and good sense. Never yield to force. Never yield to the apparently overwhelming might of the enemy.” A powerful statement of belief which captures the essence of the man.