Fundamentalist perspectives

In this blog we have discussed the use of key performance indicators a lot. These are numbers that can be used to monitor progress towards predetermined goals - and they can be very useful if selected wisely. They do, however, give a shallow view of the situation, but have the advantage of giving a quick overview of the state of affairs. Sometimes, however, a deeper look at things is certainly justified.

It is from this point of view I am thinking of fundamentalist perspectives; these are terms used to describe stock brokers. A fundamentalist among stock brokers is not likely to support a large black beard and be carrying sables around. He us much more likely to be wearing something from Gucci and talk about taking the fundamentals into account when valuing stocks. With fundamentals we understand such things as financial standing of the company to be traded, general market conditions, the weather, season, the company's manager's ability to implement change and so on... On the other hand, there are other stock brokers, the socalled technical analysts. They try to value stocks and predict the future by looking at how the stock value and some other KPI's have moved in the past. Both of these groups tend to think that the market is not efficient on the short term. The fundamentalist typically thinks the market is efficient in the long run, whereas the technical analyst will tend to explain the market from past trends and mention behavorial finance and the like. We'll save more on this for later.

I think that both these types are fundamentally wrong - but both types of analysis can be useful. In our assessment of general progress we should sometimes move from the technical analysis kind of thinking to thinking in terms of fundamentals - how have my actions effected the important things for me? Am I feeling more happy now, or are the KPI's fooling me to believe I am making progress when I am not? If the KPI's are astray when you start considering fundamentals - you need to select new KPI's that are better aligned with your true goals. One should perform a fundamental walk-through now and then on all projects one is working on, to make sure everything is allright. And, of course, by thinking in qualitative, conceptual terms, bright ideas may even be born!

Ensuring performance at the university

Are you a university student? Performing well at university is clearly important for your future career, especially in today's harsh economic climate. This is obviuos. The big question is nevertheless: what is performance and how can I measure it?

Many employers will tell you that extracurricular activities are just as important as what you study at the U. This is defintiely true and the reason for this is that activities in organizations teach you valuable real-world hands-on knowledge that can be directly applied to your future work place.

Grades. Grades are important - your average grade is important, but you should also excel at something.

Fun. Fun is important too! You can't be a student wihtout living like a student too - or, at least, that would be a bad idea... Fun minimizes the risk of not finishing your studies!

So, how do you find the right balance, and how can you make sure you are performing according to the plan? You need to make priorities. If you are good at theoretical stuff, you should definitely put enough effort into the things you do at university to ensure good grades. Try to identify your main interests and put your main focus into that area - ensure a consistent record: A's in all math and computational exams will ensure you a good tech job!

If you aim for leadership - engage in off-campus activities. Find an organization that fits your interests and seek out your position in that organization.

For fun: find your hobbies, your friends and interests, but choose strategically. Your activities in this category should be refreshing your life and your mood and should not take all your time.

When you have mapped out a strategy - define key performance indicators in each category and track them (number of pub visits with Joe per week, pages read per day in core subjects, etc.). Write down the KPI's for each week and adjust your activities to ensure meaningful levels. Find meaningful levels of each KPI by giving it some though - and adjust as you see how they work. Once in a while you should evaluate if the KPI's are right for you, are you moving in the desired direction? Are they beneficial to your life? If not, seek out others, or even reconsider the entire strategy. But remember, give the system time to work before you evaluate!

In control of your finances?

Returning to the topic of this blog; how to ensure progress in the important areas of life to ensure happiness and stress-free living, one of the things I deemed important as a student was money. This is, of course, still important to me. When we are talking personal finances, the issue of time comes up. You will have some long-term goals (become debt-free, have enough savings for retirement and so on) and som short-term goals (I really, really need a new iPod! Yeah!). How should you position yourself to ensure your goals don't slip? In order to analyze that, we need to become more down-to-earth and lay out a personal finance vision and put down a strategy for following up on that vision. I will not use the same tools for long-term goals as for short-term goals. Let us put down long-term goals first:

• debt-free before retirement
• to have $ 1 million in savings when I retire

to reach those goals, we obviously need to put money into paying down the mortgage (and other loans if there are any), and we need to put money aside. A common strategy is to put a fixed horizon on the mortgage and to follow the payment plan of the bank, to become debt-free. This strategy seems reasonable, let's keep it.

For putting money aside there are more things to choose from. We know that the expected returns from our investments are higher, the higher the risk we are willing to take. However, financial advisors tell me, not all risk is going to result in a higher expected outcome. Only risk that cannot be diversified away allows for a risk premium, says the finance guy. Ok...sounds reasonable (this is classic insight from finance and comes from the "capital asset pricing model").

We also know, from the control point of view, and from common sense, that we should be more afraid of losses as we get closer to target and the terminal time of our savings plan. Therefore, our money placements can be more risky when we are young, because we have time to recover if the market does something bad on the way (or we do something stupid). So, my strategy is to set a requirement on the expected return on investment for each decade, and then find an investment portfolio to suit that return on investment. Then, we need to compute how much to put aside each month and see if we can afford that. Possible investment return requirements:

Age 25 - 35: 15%

Age 35 - 45: 10%

Age 45 - 55: 8%

Age 55 - 65: 5&

We build up a portfolio for our current age bracket (25-35?). It will most likely consist of a lot of common stock (risky to not-so-risky), some money market funds (less risky) and some in a savings account in the bank. Mutual funds are great if you are not investing heaps of money, but beware of the conditions so you don't have to fund the fund managers when they do a crappy job.

So, when this has all been set up, how do you monitor performance and control it? Obviously, you should monitor annual returns. I would also set up a few other financial indicators, such as price-earnings ratio and earnings per share. Then, for example annually, I will adjust the profile such that it fits my desired risk. If I am earning more than expected, is this due to higher risk, or is it OK? If I am earning much less, I would reposition the portfolio (sell some stocks and buy some new ones). In any case, the most important thing is to add to the savings portfolio each month. Why? Compund interest. The sooner you get money into interest-bearing investments, the faster you earn more money. Say you have a dollar to invest. If you invest it today, what will it be worth in the future? We assume an interest rate of 15 % (quite risky!):

1 dollar invested at 15% interest is worth after

1 year 1.15

2 years 1.32

10 years 4.04

20 years 16

40 years 268

After 40 years your dollar is worth 268 dollars. If you had invested 1000 dollars, you'd have 268k available at retirement - compund interest is our best investment friend!

Next post: we'll look at short-term financial happiness

Regular maintenance - necessary for a well-functioning machine

All technical people know that maintenenace is important for any machinery. Your vehicle's motor needs oil to run. Your computer needs cleaning up now and then. This is also necessary for human beings to function well. A good maintenence plan should include: 

• time for work-outs
• quality time with friends and family
• time for reflection and intellectual build-up
• healthy diet
• time to relax

Today being a Saturday, it is a perfect day to think about these things. If you have (at least one) full-time job, family and still a friend or two, its hard to allocate time for all of these elements into your busy schedule. But if you think about it, why is it so hard? I think it all comes down to goal-setting. Put down reasonable goals that you can be happy with for maintenance too. If work-out means a brisk walk to work or just climbing the stairs instead of taking the elevator, that's a start. Of course, real work-outs are better for you, but there is only so much time to allocate, right?

Don't be over-ambitious, but set goals that work for you and make you feel well. Try to be systmatic to make sure your "maintenance plan" doesn't get neglected. Maybe you could even track some numbers (KPI's) to make sure you are behaving according to the plan? Many people do this with diet and workouts, but I think for many of us it would be just as useful to track the number of good books you read, activities with friends and family and the number of hours you sleep per day. If your schedule is packed, thinking systematically about these things is more important than for people with more "free time". Think of relaxing as an activity; then you don't feel the urge to do things all the time! Enjoy your weekend!

Personal branding - a necessity for happiness

Have you ever thought about personal branding? If you are en entrepreneur, I am sure you have. If you are employed, probably not. In my daily professional life, personal credibility is everything (I am a researcher). It doesn't matter how good my information is, unless people feel that I am trustworthy and exciting. My goal is to be someone other people want to listen to. I thought out the following important parts of my ME Inc. brand: 

• serious impression
• being well informed
• a good friend

Ok, so that is what I want people to think about me. I believe that when other people mention these keywords when asked to describe me, it improves my happiness. Then I lay out a strategy for implementation, or for self-branding. Taking one thing at the time:

Serious impression

• Dress well
• Use polite and articulated language
• Appear confident

Being well informed

• Read newspapers (I have a fair selection at home)
• Use RSS feeds from online news sources
• Talk to people at work about happenings
• Read work-related literature every day

Good friend

• Listen more than you talk
• Invite people out when they are not doing well
• Do fun things together with others
• Have confidence in others, show that you trust them

I could go ahead and just try to live by these guidelines. But do they work? I need to know. And, in order to know, we must measure. Therefore, I want few, but very relevant measures that are easy to track. Therefore, I want one KPI for each element  here. Take serious impression. How can I quantify my impression on other people? I could make a questionaire, but that seems redicilous and impractical. I have found that one that seems to work, at least at work :-) I count the number of people visiting me in my office during the week, and write down whether they are there for socializing or for work-related business. Then I compare the weekly ratio of work related to social visits. I won't reveal what my weekly numbers are, at least not yet. But I am generally happy with it, and I wasn't when I started doing this. Think about it, if the number of social visits is too high relative to work related ones, how can you change this without harming your friends and without killing the time you have to do real work? Bad ways of changing this KPI are:

• Telling your friends to go away (bad move)
• Have meetings all the time to discuss with colleagues (even worse move?)

These seemed stupid to me and they are. What I do, when social visits are dominiting, is that when a visitor goes pure social, I start talking about work-related stuff after he has been there for 4 minutes (unless he is actually talking about something fun, non-work-related stuff, which is seldom). That has not led to this guy stopping from coming to my office, but now he is more often than before coming to discuss work-related stuff. I have increased my seriousness factor. If you use this strategy yourself, remember to protect some socializers, or you will have a very boring day at work. Keep the most interesting ones in the "socializer" category :-)

So, how do I know how far to run this? I have chosen to do it slowly, convert socializers into professional contacts one by one until you feel more happy. Don't convert more than 2-3 per month (you need to make sure you don't overdo it or actually become a sociopath). I am happy now, and I have found a good ratio of work visitors to social visitors to be about 70%.

Of course, if work to social is increasing and I feel unhappy, I need to convert som workers to social visitors. This is more difficult than the other way around, and I have so far had no need to do so. One thing I can think of to do this is to show them a Ted lecture and discuss some funny things. They key to managing people without letting them know is to make them feel well while being managed. 

The technique is thus:

• Define your important goals
• Find a KPI that captures these goals as well as you can
• Find out how to change the KPI without conflicting your true goals
• Find a good value of the KPI to maximize happiness
• Use the actions you identified to change the KPI to adjust it to its "optimal" value

Hope someone out there will try the technique and that it helps managing their lives!