The Well-Read Investor

Episode 8: Douglas McCormick

Best-selling author and investment professional Douglas McCormick and host, Michael Hanson assess how business practices can maximize your family’s wealth.

Today we speak with Douglas McCormick, co-founder and managing partner of private equity firm HCI Equity Partners and the author of Family Inc.: Using Business Principles to Maximize Your Family’s Wealth. Doug’s had a tremendous career in finance and investing, and you’d be interested to know he’s a Westpoint graduate and served as Captain in the Army’s 25th infantry. He uses his expertise to empower others with financial literacy skills with an emphasis on the veteran community. And that’s why he’s on our program.

Financial literacy is a very important topic—basic education in this area can make the difference in long-term success for a family. We don’t teach each other practical finance, it’s nearly impossible to find it in school curriculum. Everyone should know how interest works: for mortgages, credit cards, and especially the high costs of education. And that’s only one side of it: to simply know the power of compounding and the value of saving just a little bit consistently early on in life is often the difference between a comfortable retirement and not.

Doug’s book can be challenging—he writes it without condescending to the reader, using real economic and financial principles, yet aimed directly at the family. I urge you—with your children, your grandchildren and with yourselves, because it’s never too late to learn—to educate yourself about how money works.

Enjoy this episode, and if you know someone who could benefit from it, make sure you share.

WRI is on twitter @wellreadpod and Instagram @wellreadinvestorpod

For more of The Well-Read Investor, follow us on Twitter @wellreadpod or Instagram @wellreadinvestor. If you have any questions, want to be on the show, or want to tell us what you think – send us an email! wellreadinvestor@fi.com.

Michael Hanson (00:07)

Greetings and welcome back to the Well-Read Investor, the podcast that profits your mind and your money.

It’s a smoky week here in the pacific northwest, but that hasn’t stopped us from speaking with our guest Douglas McCormick, co-founder and managing partner of private equity firm HCI Equity Partners and the author of Family Inc.: Using Business Principles to Maximize Your Family’s Wealth. Doug’s had a tremendous career in finance and investing, and you’d be interested to know he’s a Westpoint graduate and served as Captain in the Army’s 25th infantry. He uses his expertise to empower others with financial literacy skills with an emphasis on the veteran community. And that’s why he’s on our program.

Financial literacy is a very important topic—basic education in this area can make the difference in long-term success for a family. We don’t teach each other practical finance, it’s nearly impossible to find it in school curriculum. Everyone should know how interest works: for mortgages, credit cards, and especially the high costs of education. And that’s only one side of it: to simply know the power of compounding and the value of saving just a little bit consistently early on in life is often the difference between a comfortable retirement and not.

Doug’s book can be challenging—he writes it without condescending to the reader, using real economic and financial principles, yet aimed directly at the family. I urge you—with your children, your grandchildren and with yourselves, because it’s never too late to learn—to educate yourself about how money works.

Enjoy this episode, and if you know someone who could benefit from it, make sure you share. Here’s our conversation with Doug McCormick.

Michael Hanson (01:52)

Well let’s just jump right into questions - Doug, thank you so much for being with us. We always ask our guests first off. Why should any well-read investor read your book? So, tell us about Family Inc. And the concept of a family CFO.

Douglas McCormick (02:05)

Sure. Michael, so in terms of why I think it's a relatively unique read in the universe of financial planning. I generally think that most financial planning books fall into two categories. One that's very tactical specific advice about a certain kind of investment strategy. Those are often very rigorous. And you can employ that in a broad financial planning program, or I find there are some very holistic books that for me are not rigorous enough and they're set goals and don't get too much debt and really not actionable. And so, what I've tried to do is kind of take the best of both worlds and give people an overall strategic framework to think about all the important financial decisions that they're going to make throughout a lifetime. But I also try to bring the rigor of really digging in to give you good examples of how to apply that in life. So hopefully its strategic and actionable at the same time.

Michael Hanson (02:58):

Yeah. One thing I noticed about the book is that you really bring it in terms of talking about the real terms and issues people face in terms of finance and business, where I find a lot of these types of books kind of sugarcoat things, but you really bring the language and you challenge people to really think this way. What drove that choice? You could have gone a bunch of different directions.

Douglas McCormick (03:17):

First of all, I would say, listen, I think that it was a choice that was explicit and I would caution folks. It's not an easy read, but I think it can be a very impactful read. And so, I was really targeting a part of the market, which said I'm willing to invest heavily in learning about these important choices that I'm making, because I don't want to just get through, I want to accumulate wealth and use that wealth as an enabler to do whatever it is that I want. And so, it is purposefully pretty demanding in terms of the read. I think that's a product of my own experiences. So, I found coming out of business school, I still didn't have a good grasp of these important financial decisions and how to think about them in a way that connected them all together. And I felt like I could accelerate that journey for a lot of folks if I if I shared my learnings.

Michael Hanson (04:06):

So, tell us a little bit more about your career and your path how you came to the decision to write this book?

Douglas McCormick (04:12):

Sure. My undergrad study was in economics and I went to West Point. So, by definition, I had an active duty commitment after that. And so, I spent some time in the regular army and felt like that was a great life experience, but ultimately decided it was not going to be a long-term career. I had started a family early, so I got out of service married with my first child and my wife and I decided that we were going to send ourselves back to school. And so I went to business school at Harvard and you know, I was studying business school at Harvard had gotten an offer to go work on wall street for Morgan Stanley. And so, from the outside, it seemed like I had figured out how to successfully transition. Having said that it was a very challenging financial time for us as a family. And so I got to Boston and everything costs more than I'd anticipated. My wife worked on campus and I was investing in our future through school and managing that in a child was really difficult. And so, it was a real humbling experience for me, but it highlighted the importance of understanding the financial choices that people have to make and navigate in their own personal planning.

Michael Hanson (05:17):

Yeah. I mean, it's interesting. Your background really speaks towards discipline, I think but you do need the acumen and you need to learn a few things if you want to apply your discipline correctly. But let's go back to the concept of running your family like a business. What are some of the pros and cons you’ve found with that?

Douglas McCormick (05:31):

So, to be a little bit more nuanced about it, I don't try to run the family like a business. I try to look at the family financial decisions in the framework of what would be best practices from a business perspective. And so, let me just share the framework a little bit. So basically, it says every family can be viewed as a business. Ultimately, we're all in the same business, we're entrepreneurs. And our businesses do two things. One, we convert labor in the capital or labor into dollars, and, you may sell your labor in one way. I may sell my labor in another way, but in each case we're taking our skills, our energies, our passions, and we're turning that into dollars. And then the other part of the business is deploying your dollars in a way that they're going to grow over time.

Douglas McCormick (06:17):

And so, for me, that framework is super valuable because A, it allows me to see a very big picture and it allows me to connect very disparate decisions. Do I want to invest in education? What kind of career do I want to choose? Do I want to own a house? How do I think about financial planning or insurance or investing in retirement? So I love the fact that it allows me to look at all of those competing demands together. And I think the other thing it does is it really allows you to see the importance of a couple key things. For example, most of us are wealthiest early in life. Right? Now that sounds kind of counterintuitive. You're 25 years old. You have, maybe a little bit in checking and a very little investment assets, but you have a lifetime of labor ahead of you. And so if you think about that asset and how to maximize its value, you get to very different answers about how to spend your time, but also how to think about wealth.

Michael Hanson (07:10):

Let's talk about that for a moment, because you've got a whole chapter about how it is that you should focus on skillsets versus just straight payouts early on. Would could you say a little more about that?

Douglas McCormick (07:21):

Yeah, I argue that a career as a financial asset, and as you think about it for me, the best analogy is it's almost like a commodity. So, if I told you, you own a field of wheat and you have a couple of choices about how you manage that asset, if you do nothing with it, it's going to rot. And it goes back into the ground and you've created no value. If you take care of it and harvest it, you know, you can turn that into capital. And so your labor is kind of the same way. And I think people think too short term. In general, one of the big insights of the book is life is a very long-term game, right? So, when people think about careers, they generally think too short term. They think about what's it going to mean to them next year and this financial asset. You should look at total lifetime value of the financial asset, which basically means, how much am I making expected over a lifetime?

Douglas McCormick (08:10):

And by the way, how many years can I work? Because one of the big benefits of education that I don't think people fully appreciate is, as a white-collar worker, you can dramatically extend the period which you can effectively compete in the labor market. So, I think that's an important insight. But anyways, as you think about labor, think more about first and foremost, do something you're passionate about. If you're not passionate about it, you're not going to be good at it. If you're good at it, almost no matter what profession you choose, you can make a very good financial life for yourself. But after that, then focus on how do I develop skills? How do I develop a brand?

Douglas McCormick (08:46):

And how do I put myself in a place where I can get experiences that are really going to help me grow? And so, if you take that and say to yourself, hey, I'm going to make career decisions like a stock picker. I think it comes up with some interesting analogies. I want to go to big markets. I want to find markets that are growing, and I want to find skills that are portable into other markets. And if I think about those three things, it says, boy, wouldn't it be great. Go work at Google, Amazon Facebook, like those growth stocks also create real growth opportunities for an employee.

Michael Hanson (09:20):

So, this concept of time, which you come back to a lot, but let's talk about time specifically with investments, because you've got a lot in the book about that. And you argue that time is just, it's the ultimately resource. And you you've mentioned that in terms of potential for labor, but talk about time in the role of investment growth as well as people plan for that.

Douglas McCormick (09:37):

So, you know, there’s this saying that compounding is like the eighth wonder of the world. So first of all, time allows you to compound for long periods of time. I think the thing that's interesting for me about time as an individual investor is, it's the one way that I can compete and win against the institutional managers out there. If I'm day trading or I'm looking for short term stock picks, I am so not well positioned to compete against people that have better information. They study it all day, they have better access and they have better training, but those guys are competing on a one year time horizon or a five year time horizon, maybe. And if you look at the likelihood of needing the investment assets that you're investing most of us way underestimate the duration of how long it's going to be until we actually take that investment, turn it into cash and consume it.

Douglas McCormick (10:28):

So, we actually have a very long time. So it allows me to compete against the institutions. It also allows me to take a lot more risk in a traditional concept of risk. And so, when I say take more risk, I really mean more equity exposure. There's all kinds of studies that would suggest over long periods of time. Equities are relatively not volatile, dramatically mitigated. And the last thing I'd say is taxes matter. You know, if you're equity heavy you have an opportunity to compound on a more tax efficient way.

Michael Hanson (10:57):

I just think that's tremendous advice, when people have time on their side, equities become significantly less volatile. People are always trying to beat the markets, but you talk a lot about asset allocation and why that's such an important decision. And we spent a lot of time with our clients on that as well. So, tell us about the importance of it.

Douglas McCormick (11:15):

Let's talk about two of the aspects of the conversation so far and how it influences asset composition. The first is, we've got very long-time horizons. And just to give you a very specific example. I often find people that are getting close to retirement are like, you know, hey, I got to get conservative here, I'm 62. And I understand the concern, but the reality is even at 62, if you a portfolio that you plan to spend down over time, the average duration still well over a decade, right? So that time is an important consideration as we think about asset allocation. The other one is, let's tie that back into looking at your labor as an asset. If I look at my labor as an asset, I think it behaves very much like fixed income.

Douglas McCormick (11:55):

I'm 25. I want to retire at 65, I've got 40 years of expected work ahead of me, and it's going to pay me out almost like a bond every year, year and out, adjusted for unemployment and things like that. But if you then include that in your net worth, most young people and almost all of us are way overexposed to fixed income, if I include labor. And so, it pushes me to think more about taking my financial assets and investing them heavily in equities. And at the end of the day, asset allocation, the expected return on equities relative to the expected return on fixed income, will allow me to drive a much more attractive blended return.

Michael Hanson (12:36):

What strikes me about that, you’ve said this in various ways, but that risk becomes different with different profiles. And that in fact, what I hear from so many people, especially as they get to that retirement age or beyond, in fact, what they tell you is I wish I'd taken on a little more risk my life. And you hear that so often.

Douglas McCormick (12:53):

And Michael if I could, just one comment on risk. For me, the biggest risk that people need to effectively manage is not managing my equity risk, it's managing my liquidity risk. Right? So, long-term impairment comes from bankruptcy. And so, as you think about like what you're managing risk around, it's often becoming unemployed or it's because you didn't have enough capital to support your consumption. So, I tell people like the number one investment when you're starting out is you got to have a little bit of liquidity to manage short term unexpected things like unemployment, a medical bill, something like that. But once you've covered that, then I think you're positioning yourself in a way that you can take a lot more long-term risk because of the duration we talked about.

Michael Hanson (13:53):

I want to switch gears just for a moment. You've mentioned this a couple of times already, you have a military background by training and in the beginning of this book, you mentioned that military services just have a paucity of the right training and knowledge to help folks through with their financial decisions. That's a topic close to my heart as well. My brother's in the military service. Tell us about your thoughts around that?

Douglas McCormick (13:56):

Yeah. The issues that the service members experience, I think we see in other places in our communities that are very challenging, right? So, in general, these are general descriptions of the community. But to your point, I think the service members have great work ethic. They've got great life experiences. They know how to work hard, they know how to be team players. So, they bring a lot of really relevant skills that should make them successful in the business community. But in many cases they're also having a very narrow network. And so, all of their friends and the people that can vouch for them, the people that can give them a hand up, are in service and not out. And so they, they're not as able to transition or assimilate into the community as easily.

Douglas McCormick (14:34):

And in many cases, they got married earlier. They had children earlier and the divorce rates a bit higher and all of those have meaningful implication in your financial security. I think if we can facilitate that critical period, when a veteran transition to ensure they get engaged back into the community, they replenish their network into their hometown or wherever they end up going, that they can dramatically change the trajectory of their earnings. And so it's all about giving them a bridge from converting those very relevant and valuable skills to a community that can appreciate it. And they've got the ecosystem, which they can really Excel.

Michael Hanson (15:13):

Yeah. There's just no doubt. I find there's quite a lot of good skill sets there, business oriented skill sets, in fact.

Douglas McCormick (15:18):

Traditionally there's been, you know, a little bit higher unemployment. There's been a wage gap in terms of what veterans earn and veteran spouses again, I think that's a byproduct of the community. And so, it's an area that I'm passionate about. And I think it's an area that if we can give veterans the right access and tools, they can use it to play offense rather than defense.

Michael Hanson (15:37):

So, thinking a little bit about today, you've had such a great career in private investments in business and so forth. What are some of the lessons in your mind today that you think investors ought to know some of the wisdom you've learned over time that might be helpful for today?

Douglas McCormick (15:52):

Yeah, so I guess a couple of key themes that I think the book brings out that are not, maybe more insightful if you will, or not common. We've talked about liquidity, short term liquidity number one way to risk manage risk. I think this concept of duration we talked about, I think the acknowledgement that for many of us wealth decreases over time. And so that should, as you say that to yourself, it should give you pangs of anxiety or pressure that you better take advantage of that valuable labor you have to do something with it that's impactful. Both in terms of your financial aspirations, but also life in general. We talked about asset allocation and the importance of assuming short term volatility, for long-term appreciation, and really no more actually less volatility, as I think about volatility also, I think it's important to recognize really, we're talking about purchasing power, not specific dollars.

Douglas McCormick (16:46):

And again, when you think about it in those terms, it's even less volatile. I think the other thing that is interesting to me is just this concept, that we're all entrepreneurs. And if you think of yourself like an entrepreneur, it's a very powerful framework. The analogy I like to share with folks is the public markets, we can debate what they're going to return, but let's say it's 5 or 6% a year. And we know that the labor markets are very competitive and the average employee earns roughly 50,000 a year. And so those two big assets that we talked about, your labor assets and your capital assets are competing in very efficient markets. But if I can combine those two, which is what I think entrepreneurship is, I take my labor and I take my capital and I put them together. Businesses return returns on capital, much higher than the market does. And it's a really interesting way to shelter yourself from competition to elongate your duration. And it's also, again, very tax efficient.

Michael Hanson (17:39):

Totally fascinating. So, it seems to me that an optimistic, opportunist mindset it's still pretty relevant today and important that getting too caught up in the moment of now, especially tied to COVID and so forth really ignores the future, how do you feel about that?

Douglas McCormick (17:54):

I'm absolutely in that camp. Obviously, there are lots of financial long-term implications to COVID in the context of deficit spending, tax implications, things like that. And candidly I don't know that the story's played out enough that any of us have a view on what those implications are for investing. But I can think of very few things. We always say a stock, if you think about like the theoretical valuation of a stock, 80% of the value occurs in years beyond one through four. Right? I think the pandemic by all accounts has to be considered a one or two year problem that has dramatic implications for how businesses perform today. But shouldn't impair the long-term opportunity of those businesses, assuming that you have the liquidity to make it to the other side. So, I'm very bullish about the prospects for the economy. And so generally I'm an advocate of continuing to stay invested in equities. I will say, I think the markets seem to be a little bit disconnected with the short term reality. So again, I believe in the prospects, but a lot of those prospects may be fully priced into the market today in a way they weren't in the end of March.

Michael Hanson (19:01):

Yeah. Well, there's, that seems to be the biggest issue on people's minds at the moment. Just to round things out though, tell us a little bit about the process of writing this book. My impression is you're a pretty busy guy that can manage a lot of different things going on at once. So how did you fold this in and how did that work?

Douglas McCormick (19:16):

A couple things, first of all I kind of got inspired by it because I felt like I had something to say that was unique. I had struggled with my own journey to these conclusions, and then I had two kids and I struggled with how to, how to give them a framework that I could get behind and help them connect all the issues that they were grappling with. It was one of those things that was kind of on my bucket list, and I would tell you it was a torturous process, only because I thought I wanted to do it, I took some notes on it. I would put it away for a while. And I literally wrote it over like a 10 year period. It wasn't like I'm going to go write a book. And then I did, it was more like my personal journal turned into a work that I felt good enough about that I thought it was worth sharing.

Michael Hanson (19:57):

Yeah, that's tremendous. I personally find that the process of book writing is one that grows the author hugely. You learn not just learn a lot, but it's a huge task that accomplish.

Douglas McCormick (20:06):

Yeah. No, I think it's a great way to force yourself to really, be tight on your thinking, right? Like, I thought a lot of those things, but there's great learning that happens from just forcing yourself to put it on paper, for sure.

Michael Hanson (20:17):

What do you like to read? Especially things are maybe a little more fun?

Douglas McCormick (20:21):

I talked about my dad in the book quite a bit, and I give my dad a lot of credit, but one of his great lines that always resonated with me is, a wealthy man is someone who enjoys his work. And so, it drives my wife crazy. We go on vacation and I end up reading business related stuff because I just find it so fascinating. And I'm so caught up in the current events of the day. Like candidly, I'm just not reading a whole lot in terms of like books that that I should be reading because I think there's so much to take in. I just think this last year and the next year forward, there's so much happening economically, politically, financially that I just am kind of living in the moment right now, I would say, and trying to absorb as much as I can.

Michael Hanson (20:58):

Very good. Well, our guest today has been Doug McCormick and his book Family Inc, is one that I think folks should to take a look at, especially if they're thinking about shoring up their family's finances and communicating in that way. Doug, thanks so much for being a guest on the show. We really appreciate it.

Douglas McCormick (21:56):

Yeah. Mike, appreciate you having me on. Thank you.

OUTRO

Michael Hanson (21:24)

That was Doug McCorrmick. As we mentioned at the top of the show, the importance of financial literacy cannot be emphasized enough. Arm yourself with it—regardless of your vocation or life path, knowledge here will help you and your family greatly.

We want to know what you’re reading! Let us know on twitter @wellreadpod or on Instagram at @wellreadinvestorpod.

Oh, and you’re not going to want to miss our next episode on October 7th, when we have bestselling author Diana Henriques to discuss her most recent book A First-Class Catastrophe, on the market crash of 1987. You’ll know Diana best from her mega-bestseller, The Wizard of Lies, about the fall of Bernie Madoff—which became an HBO mini series starring Robert DeNiro. We talk about con men, the beauty of John Maynard Keynes’ writing, the New Deal, and we even talk about Herman Melville. We could have gone on for hours. That’s October 7th.

Until then, here’s hoping all your reading profits your mind and your money. Take care.

banner