- “What I’ve learned is the best thing I can do with the position I’m in, and the places I’ve gone, is sharing this same information and giving you a step by step guide on the do’s and don’ts of what I’ve gained from talking to Jay Z and these different moguls in the business — whether talking about business, or just life. I can’t keep all of the information to myself, I have to share it. Within doing that, it’s giving me just as much as it’s giving them, and that’s worth more than any dollar amount.” Forbes Interview.
K-Dot is making the same point Charlie Munger was trying to convey when he said: “The best thing one human being can do for another human being is to help them know more.” Trying to figure out everything in life by yourself from first principles not only does not scale well, but it involves lots of unnecessary pain. Life gets easier when you learn vicariously from the mistakes of other people. You can do this by watching other people’s behavior or by reading about it. Munger advises: “I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” K-Dot is also saying that an approach to life that includes teaching other people inevitably means you get back more than you give (e.g., the process of teaching anything makes you learn the topic even better). The other factor involved is what Munger has referred to as “penance.” Mohammad Ali made a similar point once when he said: “Service to others is the rent you pay for your room here on earth.” Giving back to other people is not just beneficial because you learn more, it is by itself a moral imperative.
- “If you get your first big check and you cop a chain before you buy a house. You’re a vanity slave.” Vanity Slave.
K-Dot is cautioning people to stay grounded about priorities, especially when fortune suddenly arrives. Vanity, greed and ego can cause people to make bad choices. He makes his point with an example: copping a chain before you take care of other basic needs is vanity. Concern about the adverse impact of vanity is not a new idea. For example, Jane Austen wrote: “Vanity and pride are different things, though the words are often used synonymously. A person may be proud without being vain. Pride relates more to our opinion of ourselves, vanity to what we would have others think of us.” I would rather put a viper down my shirt than let someone else determine whether I am happy. Getting control of your desire for ever more stuff is mentally healthy. Seneca once said: “It is not the man who has little, but he who desires more, that is poor.” In contrast, being ever covetous despite gains in wealth only increases the probability that you will be miserable. Can you be wealthy and enjoy that but not tie your happiness to maintaining that wealth? Seneca believed: “For many men, the acquisition of wealth does not end their troubles, it only changes them” and that “Wealth is the slave of a wise man. The master of a fool.” The best thing you can acquire with money is independence. Munger puts it this way: “Like Warren, I has a considerable passion to get rich, not because I wanted Ferarris. I wanted the independence. I desperately wanted it.”
- “A dependable savings and you’ll retire with money in your account.” The Lonely Island.
People involved in the entertainment and sports industries often have incomes that are front loaded in the early years of their career. Yes, they can work at another job later in life, but that work may not pay nearly as much as they earned in their prime years. K-Dot is saying that adopting an approach which paces consumption over a person’s entire life is wise. The best way to increase your wealth is to save more of your income. Morgan Housel puts it this way:
“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. Fortunes can be blown as fast as they’re earned – and often are – while others with modest incomes can build up a fortune over time. Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income but have no chance without a high savings rate, it’s clear which one matters more.”
K-Dot is saying that people should think more about their retirement savings in particular. As just one example of what can happen if you do not save, among senior beneficiaries in the US, the median Social Security benefit is $14,400. Trying to live on just that income given health care and other expenses is a terrible idea if you can avoid it. Here is some data on that point:
- “Take no chances, stop freelancin’; Invest in your future, don’t dilute your finances.” The Lonely Island.
While saving money is the most important step one can take to increase wealth and security, K-Dot is saying that investing is important too. The statistics on where many people stand on people’s financial preparation for retirement are dire. For example, “~1/2 of families have no retirement account savings at all. Median values are low for all age groups.” http://www.epi.org/publication/retirement-in-america/#5 …
- “401K, make sure it’s low risk.” The Lonely Island. “At 27, my biggest fear was losin’ it all.” Fear.
K-Dot is talking about the need for investors to control risk, especially when it comes to retirement funds in something like a 401K. Before a person can control risk it is necessary to define it. I particularly like the definition of risk adopted by Howard Marks: “In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, ‘The prospective return isn’t high enough to warrant bearing all that volatility.’ What they fear is the possibility of permanent loss.” Warren Buffett recently told a story about someone worrying about having enough money in their retirement that is both relevant and amusing:
“I had an Aunt Katie here in Omaha… She worked really hard all her life, lived in a house she paid $8,000 for… Because she was in Berkshire she ended up — she lived to 97 — she ended up with a few hundred million and she would write me a letter every four, five months and she said, ‘Dear Warren, I hate to bother you, but am I going to run out of money?’ And I would write her back and I’d say, ‘Dear Katie, It’s a good question because if you live 986 years, you’re going to run out of money. And then about four or five months later, she would write me the same letter again. There’s no way in the world if you’ve got plenty of money that it should become a minus in your life.”
- “Got real estate over there and hustle over here.” Enjoy.
K-Dot is saying that he will not lose focus on the hustle aspects of his life just because he has made real estate or other investments. Nothing generates wealth more reliably that a strong work ethic, a regular income combined with talent and a willingness to save and invest. My view on actively investing real estate is heavily influenced by the advice my grandfather (a real estate developer) gave to my father the doctor. He said that my dad should leave active real estate investing to professionals. If my father desired exposure to real estate my grandfather suggested that he do so via a fund. He said that it was possible for my dad to become an expert active real estate investor but only if he treated it as a second career, found an area to specialize in and was passionate about it. Here’s Munger on real estate:
“The trouble with real estate is that everybody else understands it. And the people who you are dealing with and competing with, they’ve specialized in a little twelve blocks or a little industry. They know more about the industry than you do. So you’ve got a lot of bull-shitters and liars and brokers. So it’s not a bit easy. It’s not a bit easy. You don’t even see the good offerings in real estate. It’s not an easy game to play from a beginner’s point of view. Real estate. Whereas with stocks, you’re equal with everybody. If you’re smart. In real estate, you don’t even see the opportunities when you’re a young person starting out. They go to others. The stock market’s always open. It’s (like) venture capital. Sequoia sees the good stuff. You can open an office, “Joe Schmoe Venture Capitalists: Start-ups come to me!” You’d starve to death. You got to figure out what your competitive position is in what you’re choosing. Real estate has a lot of difficulties.}
- “When you’re in this situation with all the lights on you, you’re going to get a lot of offers thrown at you, but if it’s not something that you see has longevity in it, you have to pass it up.”
K-Dot knows that there are no called strikes in investing. Patience is essential as is waiting for the right offer. Opportunity cost is a huge filter in life. Charlie Munger looks at his investing decisions in this way: “We’re guessing at our future opportunity cost. Warren is guessing that he’ll have the opportunity to put capital out at high rates of return, so he’s not willing to put it out at less than 10% now. But if we knew interest rates would stay at 1%, we’d change. Our hurdles reflect our estimate of future opportunity costs. Warren is scanning the world trying to get his opportunity cost as high as he can so that his individual decisions are better.”
- “On the business end, it just shows me: always be critical and smart about the moves you make.”
K-Dot is pointing out that it is important to think critically about your decisions since we all have a range of dysfunctional biases that can tend to result in unwise decisions. Everyone makes mistakes. Thinking hard about how you might have made a mistake due to an emotional or dysfunctional factor can pay big dividends. People who can put aside their ego-based defenses and embrace a great idea that someone else discovered tend to get better results in life. “Not invented here” too often means “no benefits here.” Charlie Munger said exactly that the 2017 Berkshire shareholders meeting: “You have to have a habit of reexamining your old ideas from time to time since without that, you can’t see it when they become wrong. A year in which you do not change your mind about something important is a wasted year in his view.
- “So just to get a dollar, will I sell my soul? I look the Devil in the eye and tell him, hell no.” Compton State of Mind.
In the end you can make more money from behavior that meets a high ethical standard. Not only it is the right thing to do morally, it is the right thing to do from a profit standpoint. Charlie Munger has said: “We don’t claim to have perfect morals, but at least we have a huge area of things that, while legal, are beneath us. We won’t do them. Currently, there’s a culture in America that says that anything that won’t send you to prison is OK.” What can be more satisfying than doing well financially while at the same time making a positive contribution to society in a way that is highly ethical? Munger tells a story about how he made a fantastic investment by wading into an area where the other people involved are ethically challenged:
“I soon realized that under the peculiar rules of an idiot civilization, the only people who were going to bid for these oil royalties were oil royalty brokers who were a scroungy, dishonorable, cheap bunch of bastards. I realized that none of them would ever bid a fair price.”
- “All money ain’t good money.”
K-Dot is channeling a point Dorothy Parker famously made when she said: “If you want to know what God thinks of money, just look at the people he gave it to.” It is that simple. Munger puts it this way:
“Ben Franklin said: ‘I’m not moral because it’s the right thing to do – but because it’s the best policy.’” “We knew early how advantageous it would be to get a reputation for doing the right thing and it’s worked out well for us. My friend Peter Kaufman, said ‘if the rascals really knew how well honor worked they would come to it.’ People make contracts with Berkshire all the time because they trust us to behave well where we have the power and they don’t. There is an old expression on this subject, which is really an expression on moral theory: ‘How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.’ It’s such a simple idea, but it’s a correct idea.” “You’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich–who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich–in money–not just in reputation.”
- “The best thing I’ve learned is that it’s not about getting a certain amount of dollars and spreading it all out. That process is meant to crumble. That process is meant to bring envy and hate, because once you stop spreading it, or once you stop getting it, you realize there’s just a lot of evil behind it.”
No matter how rich someone like K-Dot may become there are limits to what can be given away. Problems are inevitably created when too much money is given away to a friend or a posse of friends. K-Dot is saying that people who were on the receiving end of gifts have a tendency to get angry if you stop since they feel they have lost something. These angry feelings are heightened due to loss aversion. Being generous works better when you make sure that the beneficiary is not acquiring an expectation that the gifts will be ongoing. Being generous of charitably minded is not always simple. This is K-Dot in “How Much a Dollar Cost” from the album “To Pimp a Butterfly”:
“…Walked out the gas station
A homeless man with a silly tan complexion
Asked me for ten grand
Stressin’ about dry land
Deep water, powder blue skies that crack open
A piece of crack that he wanted, I knew he was smokin’
He begged and pleaded
Asked me to feed him twice, I didn’t believe it
Told him, “Beat it”
Contributin’ money just for his pipe, I couldn’t see it
He said, “My son, temptation is one thing that I’ve defeated
Listen to me, I want a single bill from you
Nothin’ less, nothin’ more
I told him I ain’t have it and closed my door
Tell me how much a dollar cost
It’s more to feed your mind
Water, sun and love, the one you love
All you need, the air you breathe
He’s starin’ at me in disbelief
My temper is buildin’, he’s starin’ at me, I grab my key
He’s starin’ at me, I started the car and tried to leave
And somethin’ told me to keep it in park until I could see
A reason why he was mad at a stranger like I was supposed to save him…”
- “It’s one thing we’ll keep coming back to — remove the ego. I promise you, that’s the most valuable thing I’ve learned.”
Morgan Housel puts it this way: “one of the most powerful ways to increase your savings isn’t to raise your income, but your humility.” Morgan knows that ego can easily get in the way of making sound decisions. As I noted in my recent blog post on Ray Dalio, he believes: “People are so attached to being right, and yet the tragedy is it could be so easy to find out how you’re wrong.” If you can learn to take ego out of your decision making you will make fewer mistakes. Buying things and making investments that stroke your ego is short sighted. People who learn to save and invest have better choices in life. Few things are worse in life than having no choices. Munger with a closing thought:
“Then there’s the chasing of the investment return rabbit. What if you had an investment that you were confident would return 12% per annum. A lot of you wouldn’t like that — especially if you’ve done better– but many would say, ‘I don’t care if someone else makes money faster.’ The idea of caring that someone is making money faster is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”