A Real Estate Career: Lessons Learned (2014-2015)

In 2014, my tax business was winding down, and during the summer I was getting anxious again.

As these things tend to happen, while randomly talking to a friend, he asked me if I wanted to join his hedge fund as an analyst.

Completely putting aside the fact the position was in Hong Kong, I accepted.  And for the next 18 months, I helped them analyze real estate and Korean stocks.

This was my first real job in finance.

When you work in finance, you get spoiled – especially if you’re on the buyside, and you have all sorts of service providers working for you.

Finance draws hard-charging, intelligent, and driven types, and when you have Ivy Leaguers and graduates of Asia/Europe’s top 10 universities as your service providers – your bankers, brokers, traders, accountants, and researchers, well, I’m not sure I’ll ever have that level of service again.  Emails were written to me in clear prose.  If there was a problem, I received a phone call explanation within seconds.  Things got scheduled, presentations were efficient, full of information, and if I asked for anything, things just got done.  No one passed the buck, and if they did, it was to actually find the person who could solve the problem, and these problems got solved in hours, if not minutes.

Sigh.  Maybe this is the daily reality for many people, but for me it was new.  This meant that literally all I had to do was focus on the thing I had been hired to do, which was to stay plugged into the markets, pore through financials and industry reports, think, and analyze.

Never before in my life had I woken up so early, before 6, to catch the bus into Central to start fielding the calls and get work done before the Korean and Japanese markets opened at 8am.  Never had I had so much energy as when I was plugged into the information flow and market chatter every day, hearing from analysts, companies, and brokers spanning Tokyo to Mumbai.  The financial markets are an arena where the biggest game in the world – the exchange of capital – is played out on a daily basis, against some of the smartest people, with huge sums of money at stake.

And looking back at that time, that’s what I miss the most.  There’s no feeling or job quite like working in the financial markets – the pace, the energy.  It’s like being plugged into an IV of chatter and information and raw sentiment.  You can actually feel, around town, when the markets are up or down.

Now onto the actual job.

Our fund had a value bent, which meant that we were looking for undervalued or overvalued companies to buy or sell.  Before joining, I had a romanticized notion that it was all about digging through data and research, coming up with some sort of brilliant, deviant opinion and using that to make money.

There is that.  But I learned I was quite naive, because identifying the stock to buy/sell is only a fraction of the job.

Being good at analysis, and picking the right name, is only one leg of the stool.  It doesn’t matter if you’re good at analysis if you buy in at the wrong time or sell at the wrong time.  It also doesn’t matter if you buy/sell too much or too little of it, or if you can’t or don’t have the conviction to hold during the hard times.  Also, since you’re never going to be 100% right, 100% of the time, you have to be constantly evaluating your own decisions, your decision-making process, your own thoughts, in context with the present and history of the market.

In short, not only do you have to be brilliantly analytical, you have to have the instincts of a gambler to size and time the bet, the temperament of a stoic to not let gains or losses affect you, and the introspection of a monk.

Only by getting all four of those things right, can you succeed in the job, and it’s why investing is so hard.

It’s always been my opinion that investing is the best interdisciplinary exercise you could ever conduct, or learn.  And one of the biggest reasons is for the last point above.

Constantly evaluating your own thinking and process for making decisions will serve you well not only in investing, but in life in general, and is the foundation for success in general.

At the fund, though, I found myself teetering on the edge of this.  If you’re not careful, endless introspection can lead you to have massive self-doubt all the time, and start going down epistemological rabbit holes, like ‘how do I know I know this’, or ‘am I sure that I know this, and with what probability, and how do I know this probability is even correct’.

In my job, I found a lot of parallels to surfing.  The financial markets do not have sympathy or other human sentiments, just like the ocean.  You can’t fight them, just as you can’t fight or force a wave to do anything.  You can only react to what’s given to you.  You can’t argue about rightness or wrongness.  The markets, and the ocean alike, do not care about you.

Working in the markets is one of the most humility-inducing jobs you can have, and those who get arrogant get crushed.

In many ways, the job gave me an appreciation for knowledge in general.  When you can sit in a room with extremely intelligent people discussing a company, and everyone has extremely divergent, completely opposite viewpoints and opinions on the company’s prospects, you begin to see that it’s hard to purport to ‘know’ or declare anything with certitude.

And that states of the world are best expressed in probabilities, and the smartest people are always questioning and changing their minds.  They’re comfortable with uncertainty, and don’t let it paralyze them.

I learned a lot on the job, but that might have been the greatest lesson for me.

What You Get in a Homogeneous Society

Culture, not ethnicity, is the determining factor of a society’s outcomes.  Korea has a homogeneous culture.  Policymakers in the US will often cite Scandinavian countries or East Asian countries to rationalize their opinions, but usually these statements have miniscule merit, as what you get in a homogeneous society is not what can be gotten in a free-for-all like the US.

Here are some notes from being in Korea for over a year now.  In a homogeneous society, you get:

  • Lower crime, and kids under the age of 10 riding the subway or bus by themselves, and walking home after leaving their tutoring academies at midnight.
  • A social problem with people inflicting physical violence on police officers, ambulance workers, firefighters, and medics.
  • Informal credit systems where neighborhood grocers will tell you to pay them for groceries later, with no mention of when or even of a deadline.  This extends to modern restaurants when the POS system is down, and they tell you to come back later to pay them back.
  • Less of a litigious society, with personal lawsuits over bodily injuries, medical malpractice, etc., not very common or pursued – mostly, these types of things are settled out of the courts or person-to-person over the phone.  Correspondingly, a lower cost of social services like child daycares ($100/mo.) or medical care.
  • A society/major city with a higher average level of service for most things.  A city that is so prosperous, that sometimes it gives out bus and subway rides for free.
  • The culinary custom of serving an entire table-full of side dishes for free, which can be refilled to your stomach’s content.  This has been going on for decades, if not centuries, and abuse has not caused it to stop.
  • An inherent-not-explicitly stated business oligarchic class that has implicit societal objectives such as high employment at the expense of productivity and margins and ROE, although none of the Korean conglomerates would ever admit to this.
  • Rampant double-parking on the street, with cars put in neutral and their owners’ cell phone numbers either printed or otherwise left on the dashboard.  If a car is blocking another driver, then the other driver is expected to push the car (which is in neutral) out of the way – and if it doesn’t work, then to call the owner, whether at 6 am or 6 pm.
  • The laxest public transportation security measures and ticket checks in the world, in my opinion.  For domestic flights, you can show up 10 minutes before the actual flight to check in and get waved through.  On trains, you can book a ticket and waltz onto the train and pass zero security checks and zero ticket attendants.  Your relatives can get on the train with you to say their goodbyes, until a message over the intercom helpfully announces that any well-wishers should deboard or risk being taken halfway across the country.
  • Older men who often communicate in a series of grunts or gestures at restaurants.
  • In playrooms (note: not schools), the moms come by with kids as young as 3 and just drop them off for a few hours.  Just drop them off.  If the kids need to go to the bathroom, one of the frontline staff, regardless of gender, takes them to the bathroom.
  • Kids who come out to the public parks on the weekend, alone, to play.  As it should be, probably.

But what you also get is:

  • An invisible pressure to conform to social norms and mores, including that of physical beauty, and a huge plastic surgery and aesthetic care industry.
  • Rampant copying and gauntlet-style jousting as the prevailing method of competition in every facet of life, from education, to restaurants, to business in general.
  • Highest average spending on education in the OECD, with high average test scores on math and science to match, but limited innovation and creativity, a lot of which is directly related to the oligarchic business complex that stifles / crushes SME’s and mom and pop stores.
  • An entertainment-industrial complex that churns out pop stars as if on an assembly line, with artists at the mercy and whim of their producers, who create, produce, prettify, write the songs, house, feed, and choreograph the dances for them.
  • High rates of suicide as people who don’t feel they have succeeded along the narrow metrics of defined success, feel they have failed in life.
  • Barriers to immigration that are causing the society to age, and die – with deaths outnumbering births, the population will soon plummet.
  • Insane FOMO, as evidenced during the cryptocurrency boom and bust within a span of a few months last year (2017), that drives speculative bubbles.  See 1997, 2007 as well for eerie rhyming.
  • Binge drinking at a societal level, and despite repeated regulations telling employers not to force employees to go on forced outings where some people die from an excessive amount of alcohol consumption, the highest in the world on a per-capita basis.  Resultant lack of productivity in the mornings after is socially accepted, as is workers showing up at 10am, red-faced and smelling like alcohol, and wasting the entire morning.
  • Liver failure and stomach cancer common from the excess amount of drinking that is required for such social situations, in combination with the spicy paste that pervades everything.

RE Voyeurism: Koh Samui Edition

When I was on Samui a few months for a project, I did a little “side”-seeing at some villa projects around the island.  Overall, with average prices in the nice areas at about ~$200/sf, I was seriously considering a purchase for a while.

What drew me to this particular project was the view.  The pictures don’t do it justice; when you’re in the villa and looking out over this Chaweng Hills vista, you feel like you’re flying.  I would like to know where in the world you can get this combination of a) this hill + beach view, b) located in a relatively urban area with most conveniences nearby (e.g. Tesco), c) in a growing tourism market, d) luxury build, e) listed at less than $1m.

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The Asset:

  • 3br villa at the Verano Residences (1 left in Phase II) as of November 2017.
  • 760 sqm of land, 340 total built area – 180 sqm indoor, 160 sqm outdoor (patio, balconies, terraces, pool).
  • Villa situated 100+(?) feet above Chaweng district in eastern Samui.
  • Price is 18.7m THB for villa only, 19.7m THB with furniture included. This is less expensive than many 3br developments in Samui, given its land plot size and views.

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Verdict:

A very, very reluctant monitor.  With an expected return of around 5-7%, I would classify this as a vacation property rather than an investment.  If we categorize it as a vacation property, ~$600,000 is a little too much for us for right now to plunk down in cash.

Actually, once I have the cash I’d rather develop my own villa and save about 30% on the overall price.  Most developers/contractors I talked to on the island noted that luxury villas can be built for about 10m THB.  Add that to land in similar locations going for 3-6m THB, and the better play is to live on the island for a year while managing the construction 🙂

Rationale:

  • Yield – yield is uncertain.  Little evidence of yields being in double-digits unless oceanfront.  Asset is fairly priced, but a 6% yield doesn’t compensate for currency and geopolitical risks and the ever-present risk of coups or other political instability in Thailand that keep people away.  Also, the airport is a privately-owned single runway.As a note, the pro forma that the developer sent to me illustrates 10-15%.  I think it may be a little high given the assumptions he uses of between $330-$700/night.  Airbnb is showing rates of at least 30-40% less for similarly-sized units and I discounted it somewhat.  There is also a long history on the island of buyers being promised double-digit yields and ending up with ones in the 6-8% range – the most notorious being the Aqua development, which is nearby, although it doesn’t have nearly the awesomeness in view or finishings.The yield is nothing to sneeze at, but you can get this yield in US SFRs in mid-size cities for much less risk, much less capital, and I can at least leverage it.My estimate may be way off, but I think even 10% isn’t enough to compensate for the various risks, especially if the point below is true.
  • Cap gains – Appreciation potential is uncertain.  Little evidence that price/sqm has risen much over the past 10 years.  Some of this may be because Samui also went through the 2007-2009 bust, but still.See below for an excerpt from decade-old newsletter from Berkeley Investment Advisors (red annotations are mine):
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  • Supply – Continuing supply that does not seem to have a natural limit.  Lots of land sales.  Although as a positive, premium product is being priced HIGHER than the target.  The big one will be Anamaya, which is directly on the coast and at a lower elevation, but right next to the beach.
  • Demand – Tourism is growing at double-digit rates per year.  No broker could or would give me an estimate of how many villas are sold per year, but I’d estimate an estimated 20-50 3BR sell per year on the island based on the absorption of the big projects.Samui is on the cusp of becoming a lot bigger.  With less than 3 million visitors it’s still on the under-visited side, compared to destinations like Bali/Phuket, but a growing blip on the radar – bigger than places like Boracay or Ko Phi Phi.  The Ritz, Holiday Inn, and Sofitel are entering the market next year..Picture3.png
  • Intangibles – Views are unparalleled for the price.  For ocean/island views with decent infrastructure and fairly urban locations (Bali, Honolulu, Malibu, Phuket, etc.), mid-$500k price leans towards a bargain.  Location in Chaweng Hills, one of the premium locations on the island.

Here’s a gratuitous picture again of the view.  Yes, that bathtub is on the balcony.

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sigh.

Great Life (& Investing) Lessons/Reminders from Dune

It embarrasses me somewhat that it took me so long to read this masterpiece by Frank Herbert.  Without a doubt, one of the most fully-imagined and creative sci-fi worlds I’ve ever had the pleasure to visit.  And written first in the mid-1960s!  Undoubtedly the entire scifi canon that came after it owes it a debt.

Also, the influences on Star Wars storylines, which came after it, are almost too obvious.  Takes the latter down a notch for me.

Paul sensed his own tensions, decided to practice one of the mind-body lessons his mother had taught him. Three quick breaths triggered the responses: he fell into the floating awareness… focusing the consciousness… aortal dilation… avoiding the unfocused mechanism of consciousness… to be conscious by choice… blood enriched and swift-flooding the overload regions… one does not obtain food-safety-freedom by instinct alone… animal consciousness does not extend beyond the given moment nor into the idea that its victims may become extinct… the animal destroys and does not produce… animal pleasures remain close to sensation levels and avoid the perceptual… the human requires a background grid through which to see his universe… focused consciousness by choice, this forms your grid… bodily integrity follows nerve-blood flow according to the deepest awareness of cell needs… all things/ cells/ beings are impermanent… strive for flow-permanence within…. Over and over and over within Paul’s floating awareness the lesson rolled.
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I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain.
These passages are one of the best arguments for, and descriptions of, meditation and mindfulness I’ve ever read.  The mind’s ability to tame itself and the body is one of our species’ superpowers.
Once, men turned their thinking over to machines in the hope that this would set them free. But that only permitted other men with machines to enslave them.
This could not be more relevant today.  Self-sufficiency of thought, thinking from first principles, will always be in demand.
Also, those who do not have the discipline or fortitude to think for themselves will be subjugated by others who do.
Very well: ‘That which submits rules…The willow submits to the wind and prospers until one day it is many willows—a wall against the wind. This is the willow’s purpose.
Don’t fight inexorable forces, whether it’s nature or the markets or whatever else.
Think you of the fact that a deaf person cannot hear. Then, what deafness may we not all possess? What senses do we lack that we cannot see and cannot hear another world all around us? What is there around us that we cannot—’”
It is 100% true that our conscious minds miss almost everything as it processes reality through a series of filters.
The mind commands the body and it obeys. The mind orders itself and meets resistance.
the proximity of a desirable thing tempts one to overindulgence. On that path lies danger.
Balance in all things.  Maintain discipline in all circumstances.
Greatness is a transitory experience. It is never consistent. It depends in part upon the myth-making imagination of humankind. The person who experiences greatness must have a feeling for the myth he is in. He must reflect what is projected upon him. And he must have a strong sense of the sardonic. This is what uncouples him from belief in his own pretensions. The sardonic is all that permits him to move within himself. Without this quality, even occasional greatness will destroy a man.
Be humble.  Always.
“Most educated people know that the worst potential competition for any young organism can come from its own kind.”
Internecine and intra-group struggles are often more vicious and insidious than inter-group ones.
“Growth is limited by that necessity which is present in the least amount. And, naturally, the least favorable condition controls the growth rate.”
Look for bottlenecks, in processes or organizations or resources.  This is a meaningful heuristic to approach any analysis.
that polish comes from the cities, wisdom from the desert.
Do you wrestle with dreams? Do you contend with shadows? Do you move in a kind of sleep? Time has slipped away. Your life is stolen. You tarried with trifles, Victim of your folly.
Always try to see reality for what it is, rather  than what you would like or fear it to be.
“Mood’s a thing for cattle or for making love. You fight when the necessity arises, no matter your mood.”
Discipline in all matters.
Muad’Dib could indeed see the Future, but you must understand the limits of this power. Think of sight. You have eyes, yet cannot see without light. If you are on the floor of a valley, you cannot see beyond your valley. Just so, Muad’Dib could not always choose to look across the mysterious terrain. He tells us that a single obscure decision of prophecy, perhaps the choice of one word over another, could change the entire aspect of the future. He tells us “The vision of time is broad, but when you pass through it, time becomes a narrow door.” And always, he fought the temptation to choose a clear, safe course, warning “That path leads ever down into stagnation.”
We came from Caladan—a paradise world for our form of life. There existed no need on Caladan to build a physical paradise or a paradise of the mind—we could see the actuality all around us. And the price we paid was the price men have always paid for achieving a paradise in this life—we went soft, we lost our edge.
Beware of paradises and complacency.
Keep in mind, though, that we need control only three per cent of the energy surface—only three per cent—to tip the entire structure over into our self-sustaining system.
This recalls the fact that seawater is less than 5% salt, and that the actual percentage that makes a system ‘tip’ is about 10%.  Often the characteristic that defines or moves an entire system is in the superminority!
Then, as his planet killed him, it occurred to Kynes that his father and all the other scientists were wrong, that the most persistent principles of the universe were accident and error.
The Fremen were supreme in that quality the ancients called “spannungsbogen”—which is the self-imposed delay between desire for a thing and the act of reaching out to grasp that thing.
A leader, you see, is one of the things that distinguishes a mob from a people. He maintains the level of individuals. Too few individuals, and a people reverts to a mob.
“When your opponent fears you, then’s the moment when you give the fear its own rein, give it the time to work on him. Let it become terror. The terrified man fights himself. Eventually, he attacks in desperation. That is the most dangerous moment, but the terrified man can be trusted usually to make a fatal mistake. You are being trained here to detect these mistakes and use them.”
Fear does not only kill minds.
The concept of progress acts as a protective mechanism to shield us from the terrors of the future.
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Deep in the human unconscious is a pervasive need for a logical universe that makes sense. But the real universe is always one step beyond logic.
Narrative fallacy and a teleological view of history are related; how we understand ourselves and the universe are on the basis of stories.  Indeed this may be how we understand everything.
“I would take them in small groups, not larger than platoon strength,” Hawat said. “I’d remove them from their oppressive situation and isolate them with a training cadre of people who understood their background, preferably people who had preceded them from the same oppressive situation. Then I’d fill them with the mystique that their planet had really been a secret training ground to produce just such superior beings as themselves. And all the while, I’d show them what such superior beings could earn: rich living, beautiful women, fine mansions… whatever they desired.”
A great tactic of recruiting to breed mindless and fanatical followers, whether the Ottomans and the Mamluks, or investment banks from the Ivy Leagues.
Yet, it is possible to see peril in the finding of ultimate perfection. It is clear that the ultimate pattern contains its own fixity. In such perfection, all things move toward death.
Great expression for antifragility.
When law and duty are one, united by religion, you never become fully conscious, fully aware of yourself. You are always a little less than an individual.
This is what makes theocracies extremely strong, whether in the past or in the present day.  This is also what makes high performing teams extremely strong.  When the individual disappears, the group is indomitable.
“They’ve lost the initiative, which means they’ve lost the war.”
This doesn’t mean always to take action, as waiting itself is a kind of action.  It points only to the necessity of being alert and aware.
A sum of decisions had accumulated in his awareness.
This is a great pithy phrase for what I’ve often longed to express an
How often it is that the angry man rages denial of what his inner self is telling him.
Anger, fear, emotions cloud our judgement.
Time could be made to serve the mind. One concentrated the entire attention.
The way it is made to serve the mind is nothing more than taking the time and effort to concentrate and focus, and that is the way great things are accomplished.
“It’s been so long since guerrillas were effective that the mighty have forgotten how to fight them,”
Be a student of history.
“The power to destroy a thing is the absolute control over it. You’ve agreed I have that power. We are not here to discuss or to negotiate or to compromise.
You cannot win against people who have less to lose than you.  The side that has a lower BATNA (best alternative to a negotiated agreement) has the upper hand in a negotiation.
They’re accustomed to seeing the future, Paul thought. In this place and time they’re blind… even as I am.
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“Expect only what happens in the fight. That way you’ll never be surprised.”
Do not expect anything to happen, this is a basis for fallacies, mistakes, error.  Those who live constantly in the future or who are certain, are prone to disappointment, denial, paralysis when something serves to challenge their worldview.
“There will be flowing water here open to the sky and green oases rich with good things. But we have the spice to think of, too. Thus, there will always be desert on Arrakis… and fierce winds, and trials to toughen a man. We Fremen have a saying: ‘God created Arrakis to train the faithful.’ One cannot go against the word of God.”
Do not try to create utopias, accept the struggle.  The Way is through the struggle.  It is worthwhile to even artificially create hardship in your life.  When dynasties, families, organizations forget where they came from, that is usually the beginning of the decline.

RE Voyeurism: Ellui City, Seoul Edition

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Officetels are residential/commercial zoned mini-apartments in Korea.  This one happened to be in my neighborhood, which has great location characteristics:

  • Next to Lotte World Tower, the 5th tallest building in the world and tallest in Korea.  The combination of this, the Lotte World Mall, Lotte World Department Store, and Lotte World (1 of 2 largest theme parks in Korea) within Instagramming distance of the project puts it in one of the most trafficked tourism areas in Seoul.
  • Next to Samsung SDS, National Pension Service (Korea’s SWF), Coupang, other large employers besides Lotte, who owns the subdistrict.
  • Next to 2 existing subway stops, with construction happening on a 3rd gives it premium access.

The location can’t get better for a residential district in South Seoul.  Office-adjacency wise, you can probably find better around Gangnam Station proper and the Samseong (Trade Tower) areas, but Jamsil is a rising office subdistrict.

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Return characteristics are a bit flimsy for foreigners though:

  • Smallest units are ~170 SF, and go for 195m KRW, which is more or less $180k.  Foreigners will pay an acquisitions tax on top of this.
  • Payment structure is 10% down, 60% over a 2-year construction period, with the remainder due at the end.
  • Residents only can qualify for a interest free loan for the 60%, during the construction period, which converts in a permanent IO loan @ 3% after delivery.
  • Rents forecasted at about 750k KRW, with a 10m KRW deposit.  You are reading that right, welcome to the Korean lease system.
  • Returns for domestics would thus be around ~8% on equity.  For foreigners, according to my calculations, maybe 3-4% at full occupancy.
  • They claim that actual market prices for this type are about 240m, so you would instantly have some cap gains at delivery.

Verdict: worth a look but pass.  I like the product type; Korea faces the same demographic issues as Japan – lots of singles who marry (if ever) at older ages – and the product type is amenable to AirBnB’ing.  The numbers more or less check out, but the lack of financing makes it not so good for me.  Also, KRW/USD is not particularly cheap ATM.

Also didn’t like the shifty typical RE-agent ways of the sales team.  An agent initially told me it was a 100m KRW sales price when I was passing by him on my bike, then the actual price turned out to be 2x.  Also claimed it was only 50% sold but then when we looked at the units, only 3 of the 10+ floors are still available.  Also, the closer guy they brought in to try to pressure us had these smoke-stained lips and kept leaning in with cigarette breath.  He looked disinterested the whole time.

What We Call Luck or Success is Actually Investing Well

Or, even a lottery winner had to buy a ticket.

Not to conflate the above with investing, but the point is that what we often call luck or success is the result of hundreds or thousands of low-cost (or high) and invisible options working in concert.

Every time you move through this world, incurring costs in the form of time, effort, pain, you are building a portfolio of invisible options.  Whether its learning a language, attending a course or university, traveling out of town, a conversation, going to a party (“networking event”), reading something, learning anything.

Options can develop on their own, with little effort, with the addition of time; i.e., the proverbial investor who buys a building in a dilapidated neighborhood and reaps the rewards decades later when it gentrifies.

These options are hidden and hard to quantify and so we often dismiss them, but I believe they’re a true source of wealth.  Think about the saying ‘right place, at the right time’.  Well, that person had to travel to or be at that place, with that particular mix of skills or mindset.  Traveling somewhere is an option, the mix of skills and experience you carry with you are also a compounded, well-mixed option.

This is why the young are wealthy beyond imagination, although they don’t even know it – not only do they have more time, they also are able to accumulate options more quickly and cheaply than older people who have entrenched obligations, deteriorating energy levels, higher opportunity costs, etc.

A thought experiment: What low-cost options am I picking up every day?  What can I do, to drench myself in optionality?  🙂