It’s Eddie time, yo.
The primary purpose of last week’s Bezos and Skilling allegory is to advance the idea of not just investing in the long term, but to evaluate how you value your time and investments on a personal level. For example, given you had spare cash to invest, the majority of PF bloggers would espouse one of or a combination of the following:
- Pay off debt
- Put it into your emergency fund
- Invest it in index funds within your RRSP (really advanced ones would suggest you re-invest the tax savings into paying off your mortgage)
- Put it into a TFSA
Fine, but brutally simplistic, myopic, and frankly of little value. Taking any option listed above would have very quantifiable pay-offs. Retiring debt would lower your cash holdings on the asset side of the balance sheet but decrease liabilities as well. Any other would leave the overall assets to liabilities and equity balance equal; cash would merely be turned into investments. Accounting aside, your financial or loan officer would immediately and easily notice the change. Slow clap.
I would humbly suggest that you expand your horizons and research other avenues to wealth. RRSPs are all fine and dandy, but the returns from the stock market are generally moribund and it is difficult to borrow against holdings in a RRSP. Consider that capital gone and useless until age 65. From my research on franchises, the average payback period is between 1 to 2 years, or a return of 41%-100%. It would be more work, yes, and the barriers to entry are higher, but it beats Enron stock. With access to the right information, the financial metrics and implications of many franchises can be had.
One of the most unquantifiable returns is that of education. I’ve harped on this before and will continue to do so, but let me briefly describe a personal decision that I (and my wife) made. Last year, I was 10 years into a 25 year career in the armed forces. I could have stayed and collected my pension at 42 years old (like most PF bloggers would have), but I released and cashed it out. We moved cities, bought a house on her self-employment income, became pregnant, and started our new life. I did not have a job and I committed myself to a $60,000 Executive MBA. Everybody questioned the value of the MBA, as the returns were murky, and suggested I take a more traditional approach. A short term philosophy would have suggested so, but I was going with Bezos and going long term.
It turns out they wrong and I was right. I got my first and second jobs because of the MBA, my mentor is a COO at a billion-dollar oil company and has helped me immensely, and I am doing due diligence on business ventures with my classmates. The returns are not yet quantifiable, but I am absolutely certain they would have been better than any ETF that a couch potato investor would have recommended.
Investing in education can be thought of as precarious as the returns are not guaranteed and not easily computed. However, I suggest you take a Bezos-like approach and have confidence that it is the right move without having the financial metrics to support it.
If you want to go down the education and skills route, I suggest the following:
- Take a basic financial accounting course – this is one of the best ways to become financially literate. This will introduce you to concepts such as income statement, balance sheet, cash flow, net income, debits and credits etc. This will help you immensely, as you will see the parallels between it and personal finance
- Take a managerial accounting course – managerial accounting focuses on internal costs rather than for financial reporting. You will be introduced to concepts such as variable and fixed costs, operating leverage, and contribution margin. Also very important stuff.
- Take a basic finance course – whereas accounting focuses on past financial transactions, finance is future oriented and teaches valuation, cost of capital, debt and equity concepts etc.
While some people would recommend a HR or operations management course, the three listed above are must-dos in my opinion. You will find your way thereafter. As your mind gets primed, thoughts of RRSPs and emergency funds will dissolve into irrelevance.
It is evident that I espouse a long term approach to life and investing. Sometimes that requires making investments of time and capital into solid yet less quantifiable ventures that are based on intuition. Jeff Bezos followed this approach while building Amazon. Skilling, criminal actions aside, myopically focused on share price. Unless a company wants to make another public offer or a shareholder’s revolt is imminent, I never understood the logic of a CEO focusing so intensely on share price. Similarly, as long as you personally are not on the cusp of bankruptcy, it is often times best to make strategic investments, like skills development and knowledge acquisition, than toss money into the inflexible pit known as the RRSP.