A dozen or so things I've learned from Joshua Kennon
Since the inception of my blog, I have sought out to interview people who I think are living or trying to live their American Dream.
Some of these people are incredibly busy, Whether that's running their own companies, doing book launches or backpacking across the world. These people I admire had to turn down my request to interview them.
I was feeding my obsession for Warren Buffett and came across this this site called 25IQ. Over there they have a series of posts entitled “ a dozen things I've learned from” each post is a very detailed account of how the titled individual has taught the author about marketing business or investing.
I thought to myself, “ that is something I'd like to try”. If they don't have the time to do an interview, I'll just profile them based on the public knowledge they have left out for the world to see. However, unlike his posts, I want to profile people who are lesser known - as in not billionaires.
The first person to be profiled is someone who I have have been reading for the better part of 6 years.
His name is Joshua Kennon.
He is a “ Buffett lite” if you will, He started his first company when he was still in college and by the time he graduated he was making six figures.
He used that income to create more companies and create a investment portfolio based on value investing principles.
He co-wrote “The Complete Idiot's Guide to Investing” and he runs the investing for beginners section on about.com.
Joshua is pretty accomplished in his 34 years of life.
Here are 12 things I've learned from him over the years:
“A common mistake I see when people attempt to honor this principle is a tendency to focus on sticker rates and/or first-order effects. They look solely at the immediate income or immediate outflow of a decision, ignoring other relevant cash flows that might result down the line which should be appropriately discounted.”
In this passage Joshua was referring to what he calls cash levers. When looking at a purchase we tend to look at the up front cost of the purchase without thinking of the long term life of the item. Cash in, cash out is important but remembering to measure the back end costs is also important. Think of buying 10 dollars flip flops vs buying 55 dollar flip flops. Yes, up front the $10 pair of flip flops is cheaper however, how long will they last?
“Our in-house valuation approach was and is essentially an extension of entrepreneurship in that Aaron and I think of ourselves as being in the business of acquiring risk-adjusted cash flows”
This applies more to those who are actively managing their portfolios ( which I strongly suggest that you do not) none the less, this quote sets the frame for how one should view their investment business.
“a dollar is a dollar is a dollar – are difficult to overstate. To put it more starkly, despite our preference for passivity, there is a limit at which the trade-offs, especially adjusted for deferred tax consequences, become too great to bear.”
Historically the stock market has generated the best inflation adjusted return over the past 100 years. That doesn’t mean that the stock market will always produce the best ROI. If real estate starts generating after tax returns of 25% while maintaining a certain level of “hands off” then look for Joshua and myself to start investing in real estate.
Having a dollar delivered to you while you sleep is the ultimate goal, how you get that dollar is open for you to figure out.
“I run one of my brother’s accounts in a way that, were I to die, he is to immediately seal it and make no changes for the rest of his life. While I’m around to manage it, it is another pool of capital but I do it in a way that at any moment, without notice, it could become a so-called ghost ship or coffee can portfolio and do fine. In a very real way, I think of myself as a collector. Only, instead of things other Americans collect, such as decorative plates from The Franklin Mint, I collect cash flow.”
Here you can see that Joshua maintains his belief that he is buying cash flows discounted back to the present. He also mentioned that he maintains his brother's account in a conservative manner mostly following the dividend growth method.
I run portfolios for a few members of my family as well, however my belief is that all moats eventually dry up some faster than others. Armed with that belief, if something was to happen to me, I don't want my loved one to have to think about their investments. I don't use the dividend growth method, instead I use indexing.
“Never forget that no matter how good a price you get on the buy or sell side, you will almost never capture the bottom or top; don’t even try. Be sure that your price is good.”
The stock will continue to go down and it will continue to go up, if you are in the business of valuation then you have to apply a margin of safety to your purchases. That will insure you are generating a good price.
“ (One of the lessons my grandfather, who owned a demolition company in San Francisco, used to teach my dad was, “Never contract for a low-paying job just to stay busy. It will take up your time and make you unavailable to act when the really lucrative opportunity comes down the pike. Sometimes, to make real money you have to know when to turn down cash flow today.” There are echoes of this philosophy in Abraham Lincoln’s quip that if you tasked him with cutting down a tree in six hours, he’d use the first five to sharpen the ax.)”
Like baseball you are always waiting for a fat pitch, unlike baseball however, we don't have to swing if we don't want to. Don’t waste your time on .3% returns instead wait for your fastball down the middle and knock it out of the park with 15% (at least) returns.
“One of the cheat codes for success in life is to make sure you are measuring the right things. As Peter Drucker and Henry Ford both put it, “What gets measured, gets managed.” When you begin to ask yourself, explicitly, what you are measuring in your personal life, your business, your portfolio, you’ll often be surprised at how many mistakes are being made around you.”
How are you judging your success? What are you measuring it against? You set your goals , then you lay out a plan to achieve them and finally you measure your progress. I am a firm believer in actively managing your affairs.
Instead of a fund manager set out to manage your own portfolio by investing your money in a index that mirrors the s&p 500.
“To me, the two most important lines on the spreadsheet are going to be at the bottom:
“The total net earnings, and
The total cash dividends.
“The total net earnings, and
The total cash dividends.
If you wanted to get richer, your job is to make those two figures grow as quickly as possible on a risk-adjusted basis.”
This goes for your investment portfolio your personal finances and your business. Keeping expenses low while increasing your earnings is the ‘da vinci code’ of monetary success no matter the place. ( business, investments or personal)
“Productive Assets Make Better Long-Term Investments Than Gold Due to the Generated Surplus
How is this possible? Businesses and other productive assets, by definition, are systems that produce surplus value, or purchasing power. It doesn’t matter how we measure that value – dollars or gold. That is, in a nutshell, what we care about: purchasing power. Investing is about putting aside money today so that you can enjoy more cheeseburgers, cars, houses, video games, watches, vacations, books, tickets to concerts, or rounds of golf in the future.”
The dollar has lost over 90% of its power in the past ¾ century, but that hasn’t stopped fortunes form being made. The reason is business transactions, no matter the value of the dollar, have to get done in order for life to go on. We have to buy food, pay taxes, fill up our gas tanks. If the cost of goods increases we simply charge more for our services. This purchasing power can not be replicated by gold or other commodities because it relies on the greater fool mental model. Your gold is only as valuable as what someone else is willing to pay for it. In a economic crisis will gold be any more valuable than a firm like Abbott Laboratories which makes the medicines that you or your grandmother need to live?
“If you spend less than you earn, that surplus capital represents the building blocks you can use to form whatever life you want. It all starts with saving money. You have to have capital. If you don’t have any, raise it from someone else who does (just be sure to follow all the securities regulations and that the terms are favorable to you and fair to them). If you are armed with a pile of capital, you can look around and find a way to serve society in a way that gives them the products and services they desire, and you the return you demand on your efforts and savings. Maybe you’ll end up selling sandwiches, perhaps you’ll be breeding horses, or you might even end up launching satellites; it comes down to your own skills, talents, and passions. It all starts with saving money.”
This last passage is the New American Dream mental model. The goal isn’t to necessarily be rich, it's to live below your means so you can create a foundation to live on that doesn’t require you to trade your time for work. Once you have that foundation built; how you choose to spend that time is up to you.
For more of Joshua visit his site here, and also visit here Investing For Beginners