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Family Inc: Viewing Your Career as Investments

Since we are on the topic of job switching, I thought of writing some financial and non-financial decision points I considered when making these decisions that I had over the years.

However, these thoughts are rather jumbled up in the head. And this week, is not the most conducive to think about these things because I am picking up some stuff… that requires a little bit more manpower.

So perhaps that will be left to next week.

One book that have been on my mind to write about was this book called Family Inc.

This is not a very popular book, but you can find a few in your national library. I planned to see if I can do a series on this book because I find a lot of what he talked about my resonate with my readers here.

Family Inc was written by Douglas P McCormick. The way I will describe to you is that this is a personal finance book, for the experienced wealth builder. It is ideal for those who have gotten your financial house in order, and have lived a life of working, getting married, having children for probably 7 years.

Then this book will be really helpful.

And it is not so hard to read as each chapter is rather short. It does require some context on what you know about personal finance, and wealth building. That is why I think it is better to read some simpler book as a start.

Doug, in his life have been a

  1. Active duty army officer
  2. Investment banker
  3. Private equity investor
  4. Founded HCI equity partner where he was the managing partner overseeing strategy, investments and operations
  5. Brother of Bridgewater Associates Co-CEO David McCormick

So this book is how an investment and management guy look at personal finance.

If you think about it, someone in our family should be the chief financial officer, or the one looking into the finance. However, not many of us have someone in that position, or have someone there but not as sophisticate. Doug tries to use bring home his work experience and us that to see how we can visualize and structure our home finances.


Maximizing Your Labor

In a lot of the books that I read, they come from an angle of trying to fix slay the biggest monster in your life.

And for a lot of people that is the debt you have, the unhappy, unfulfilling lives you live, that does not match your internal value system.

To connect, they try to build symmetry about their lives, with your life, or establish authority on how they can solve your problem.

The first 3 chapters of Family Inc, is about your Labor.

Because to Doug, that is probably the biggest determinant of your eventual wealth.

There are those that believe with higher education, you will be offered higher paying professional opportunities.

This is generally true from the data he gathered.

The labor statistics data show the net present value of the labor versus the cost of education makes it worth while.

This is the right way to look at things, because we often do not view our human capital as a asset on your family’s balance sheet. One of the reason might be that our career nowadays are so volatile so how do we value it?

In the USA context, there might be a bigger case for higher education because there are a sizable population that are less educated. In that context, pushing for higher education make a lot of sense.

It remains to be seen the impact of spending on higher education to your value of lifetime labor.

Not all Degrees are Created Equal

Having said that, Doug acknowledges that not all degrees get compensated well, despite we spending a lot of money on it:

“The conclusion is pretty straightforward: Quantitative and other skills that are commonly applied in a business environment garner compensation dramatically higher than “softer” skills focused on humanities.”

Family Inc

The Huge Asset that is Your Human Capital

If we look at our family balance sheet as a bunch of assets and liabilities, your human capital is probably the largest. In this chart above, Doug showed us the expected value of our after tax labor.

At the start it can be worth $2 mil. You have the chance to enhanced it by doing well in school, learning a valuable skill. This allows you to earn a compensation. If you continue to improve upon it, and it is in demand, your compensation will grow at an above average rate.

Thus in this example, $2 mil.

Overtime, your human capital will come down, because there is less time left, and the net present value depends on time.

Here are the danger for many:

  1. If you make poor career decisions like myself, then your actual human capital when you look back at age 65 will be much less than the projection
  2. That is a lot of money! If you do not allocated this wealth that you earned from human capital well, you are more likely to suffer. (realize that there is a decay to your human capital, the asset is not maintained over time!)

You would realize that from the age 67 to 90, you are depending on your financial assets built up (red) and the government pension plan (purple)

No surprise why Doug put this in the front 3 chapters because if you do not get it right…

Educated people work longer

Doug said something that is a little controversial but I think generally it makes sense.

In blue collar work, what you may need is energy. There might be a point where your energy goes down, or in some worst case severely impaired.

White collar office work would allow you to work beyond 65 years old.

Working longer puts less stress on your retirement as well:

  1. You are spending the money from your work compensation for these 3 years
  2. You are extending your investment assets by adding on to it, which extend the longevity of the asset
  3. You are not spending down your investment assets for the 3 years

By doing this you might extend how long your financial assets last probably by 6 to 8 years. You could spend a larger sum in retirement as well.

Pursue Work Experiences with the Broadest Range of Applicability

My thinking before reading this is that it pays to be a specialist.

When you become really (I mean really) good at something, you are in demand and you are compensated really well. The downside is that, if you are in a role, or scope that is sunset, your career risk is very high. (in this case, you better have made use of that great earning power to build some financial assets!)

Doug tries to answer the question of what company or job they should pursue.

He thinks the question is wrong. We should be asking what choices provide the most professional opportunity now and the most options for future growth. Today’s workplace is too dynamic and our expected career is far too long to attempt to make good job choices based on future prospects for one company or position.

Doug thinks we should develop varied expertise in more business functions such as finance, IT, HR, sales and marketing and general management.

What this allows us is not choose companies BUT specifically industries.

He cites specialized profession such as airline pilots, general practice medical doctors where the industry have undergone changes such that they have underperform the general markets.

The contradiction here was that he was advocating both being specialized and general. He tries to explained this better:

Specialized education with a bias toward the hard sciences and quantitative skills fosters one’s problem solving ability that can be applied broadly.

To maximize the value of your labor, specialize with a bias towards hard skills in your education and seek varied professional roles and challenges in the work place.

The idea that I get is that when you moved up to a certain level (maybe only a managing partner will understand this better than a grunt like myself), which domain of company matters less than how well you are in those general roles (sales, marketing, general manager, HR, CTO, CFO, COO)

How a Growth Investor Allocates Human Capital

As a investor, Doug has a unique way of looking at a persons career. He explains that he invest his labor by emphasizing high reward opportunities in spite of higher risks.

This is counter to the value investor way.

The main reason for this is difference in approach is that there is no risk of loss for your labor other than opportunity cost.

If the risky venture does not work out, you simply take your labor, your recent experiences and battle scars to another opportunity.

He views job choices as stock options.

There are many parts to a stock option:

  1. Time. This is the duration of your professional career.
  2. Volatility. This refers to the likely up and down of the labor markets and industry where you work.
  3. Price Differential or how above or below the current price is the exercise price. This refers to your compensation (in salary, stock options and human capital investments) and the market compensation for your skills.

This makes it worth while to go for a job that pays $40,000 per year when the market rate is $50,000 per year. While the current return is lower, this is compensated by the ability to earn more in terms of

  1. new skills
  2. equity ownership
  3. marketable skills
  4. building your brand

Evaluating your Career Opportunities as a Stock Investor

Chapter 4 was a really good chapter to read because I have always thought you could look at your career as if you are investing in a stock.

However, what metrics do we use to evaluate whether this career or industry is good? Will we fall into the trap by evaluating our career on one metric like our parents, which sometimes turned out to be disastrous?

  1. instead of buying a stock with cash, you are exchanging your time for compensation in salary, experience
  2. prioritize opportunities that provide a best mix of cash compensation, ownership, professional development and options for different employment in the future

Doug then takes us through the path that 3 of his Harvard MBA friends took:

  1. Doug chose investment banking. Low risk of layoff and high cash compensation for junior professionals. Provide valuable branding or personal franchise skills in finance and investing, as well as access to professional network
  2. Susan was a Mckinsey consultant but chose a job that have startup risk and lower initial cash compensation. But the industry is rapidly growing. She eventually got into a leadership position in Google
  3. John return to a large retail company he worked before taking the MBA. Cash compensation was high. The industry growth was low, but business model was sound and access to good but not great business network
  4. Jason who was an engineer joined a company that made construction equipment. The company has a long history of success and gives a good cash pay. This was seen as a low risk move. However the location was not ideal for professional networking. The industry is slow growing, and market was cyclical

Doug identified that most of the more successful ones embraced market risk. But not just that they:

  1. identified businesses with good growth prospects
  2. sound business models
  3. have professional networks that they can exploit

From here, Doug gives us a few angles how to evaluate our career opportunities

i Establish the Risk-Return profile

The first is to be able to understand the relationship between risk and reward of the career and industry you choose.

Like investing, you must develop a thesis about the career and industry that you choose. By understanding this, it allows you to know whether you should “hold” or “sell” this company you work in.

For example, your company have long been rather stable. It is like a stable bond. However, in recent years, organization development may point to that in the future, that compensation structure has changed.

Critical evaluation may lead you to the decision to leave this job.

ii Evaluate the Long-term growth potential

Doug says the for a long term investor , the growth is the largest driver.

For a person with a 50 year career, the growth rate is even more important. Not just cash compensation, the non-cash compensation such as professional opportunity, chance of advancement, less likelihood of layoffs is also better.

Doug gives an example of two workers with same amount of stock options, at the same valuations. One has a 10% earnings growth rate and the other 3% earnings growth rate.

Had the price earnings stayed the same, the first one would make 12 times that of the second one.

iii Use Return on Tangible Invested Capital to check your Company’s Capital Efficiency

Doug prefers this to ROE, ROA or ROIC because it gives the purest picture of a company’s cash flows from operations relative to the invested capital to run the business.

A good figure would be above 20%. This would be higher than the cost of capital investors demand.

A good ROTIC indicates the good demand of the company’s services and products. It also indicates high differentiation from competitors.

These businesses tend to have lower assets and based on human capital. This would indicate that since human capital is important, they will pay better.

iv Look for a Robust Business Model

Doug gives a list of things to evaluate the business model of the company you work for:

  1. Predictability of revenue
  2. Fixed versus variable costs. More variable cost are industry more susceptible to boom and busts
  3. Safety of business assets.
  4. Local service delivery model and minimal risk of technology disruption

v Favor a conservative capital structure

If the firm that you work for is highly leveraged, that might not be the most stable place to work for, if you plan to stay there long.

vi Employ the concept of portfolio diversification in your labor decisions

Lastly, Doug gave some areas to think about when it comes to creating more resilience in your home finances

  1. Have a broader breadth of skills
  2. Evaluate the size of the industry. The bigger the better
  3. Evaluate the geography of the opportunity. The bigger the better
  4. Diversify the family labor. Do not have both the husband and wife all from the same industry

Conclusion

This might be a bit cheemology for some of you but I do appreciate him listing everything down and create a framework for us to think about.

I think that is the greatest value because we do not know what we don’t know. And having someone who was successful in his career explained what he sees is great.

Let me know where you agree with, and where you don’t.

Family Inc is a Good Book. You can pick them up in your book store or the library.

My Family Inc Series of Articles are:

  1. Viewing Your Career as Investments
  2. 8 Weaknesses of Conventional Family Asset Allocation
  3. Measures of Family Wealth

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lim

Saturday 13th of July 2019

if you join investment banking but you are in the bottom half of performers - thats a 49% probability (because there are so many better than you), you are not going to go anywhere fast. All the opportunities (and chances to gain new skills) go to others.

better to be somewhere where you are in the 25% of performers. That way, you can be recognised in your company and industry, and can be head-hunted for other jobs.

Demand and supply. people with good soft skills are harder to find and identify, and scarcity leads to higher wages.

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