In this month’s newsletter, I would like to discuss something that can potentially make things much easier and simpler for you in property investing. But let me start with a bit of background information before I let you in on what it is.
A bit of history
Many property investors I have met here in Australia have heard of some of the following quotes from the Chinese philosopher Confucius (551 BC – 479 BC):
- “What you do not want done to yourself, do not do to others.”
- “Choose a job you love, and you will never have to work another day in your life.”
- “Life is really simple, but we insist on making it complicated.”
- “I hear and I forget. I see and I remember. I do and I understand.”
There are a few less well known ones people also like:
- “Our greatest glory is not in never falling, but in rising every time we fall.”
- “When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps.”
- “If I am walking with two other men, each of them will serve as my teacher. I will pick out the good points of the one and imitate them, and the bad points of the other and correct them in myself.”
What most people outside of China do not necessarily know is that one of the greatest contributions Confucius has made is his moral code on how to be a proper man in a society, i.e. what is considered proper behaviors and duties of a person in a society based on what ‘hat’ they are wearing.
For example, if a father doesn’t teach his son, he is not wearing the hat of a father; if a soldier doesn’t follow orders, then he is not wearing the hat of a soldier; if a governor doesn’t look after his people, then he is not wearing the hat of a governor; etc.
Elias Canetti, the 1981 winner of Nobel Prize in Literature, described Confucius’ work Analects (analects means a collection of short literary or philosophical extracts) with the following statement:
“Confucius’ Conversations are the oldest complete intellectual and spiritual portrait of a man. It strikes one as a modern book; everything it contains and indeed everything it lacks is important”.
Many historians even attribute China’s two thousand years of prosperity since Confucius to his set of moral codes. Confucius believes a society will prosper when its people are governed by virtue rather than fear. Virtue is largely measured by whether a person can wear proper hats for the roles he/she has assumed in a society. Some may think the historians went a little extreme, but I can see where they are coming from.
For over 1,400 years since Confucius’ moral code was introduced, China had been using anImperial Examination system to select and promote government administrative officials based on Confucius’ moral codes; this obviously affected the entire education system.
Under the Confucius moral code, China’s GDP reached its peak of 33% World GDP in 1820, and was twice the size of the second largest economy at the time. To get a feel of what that means in today’s terms, the world’s current largest economy the US, only represents less than 20% of the world’s GDP.
When you add to the complexity with China having over 250 different spoken languages and more than 55 ethnics groups, it is quite impressive that Confucius’ moral code was universally accepted as the mainstream moral code for China ahead of the teaching from Buddhism and Taoism.
China’s decline in the early 20th century happened to coincide with the abolishment of the Confucius based Imperial Examination system. During the 150 years before the 1970s, China’s various governments moved away from the Confucius moral code, its economy also happened to drop from 33% of World GDP to less than 4%. In the 1980s, China started promoting Confucius moral code to its people again. Coincidentally its economy has since gone back to the 2nd largest in the world in just 3 decades.
Obviously I am not here to discuss moral code, philosophy, China or Confucius. I am here to find out what we can learn from this to help improve our financial wellbeing through property investing.
I figured if ‘Wearing Proper Hats Properly’ can have something to do with the prosperity of a nation, it would probably have something to do with the prosperity of a family (and an individual person). After all, as Confucius said it himself: “The strength of a nation derives from the integrity of the home”.
Then why is ‘Wearing Proper Hats Properly’ important for us as property investors? Let me break this down into multiple sections.
1) How many hats do we wear?
Let’s look at a typical person:
Age: 1 – 2
Behavior: eat, sleep, you know the rest.
Duty: be cute.
In the list below, without going through all the behaviors and duties for each hat throughout one’s life, I just added more hats in bold and in brackets to show you how one can pick up more hats along the way without necessarily knowing it or dropping the old ones.
- Age 3–12 (good kid):
Hats: Baby + (son/daughter + student + friend)
(We may not think we are a baby any more, but ask our parentsJ).
- Age 13-19 (teenager):
Hats: Baby + son/daughter + student + friend + (teenager + boyfriend/girlfriend).
(We may not think we are a baby any more, but why does our boyfriend/girlfriend still call us ‘baby’☺?).
- Age 20-30 (working, before family):
Hats: Baby + son/daughter + student + friend + teenager + boyfriend/girlfriend + (young adult + employee/employer).
(We may not think we are a teenager any more, but we may still act like one at times ☺).
- Age 31- 55 (raising a family):
Hats: Baby + son/daughter + student + friend + boyfriend/girlfriend + young adult + employee/employer + (father/mother + husband/wife + property investor/developer).
(We may not think we are wearing the hat of a boyfriend/girlfriend any more, but our spouse would expect us to continue to wear it, obviously only for them, not anyone else! ☺).
- Age 56- 65 (Kids becoming parents):
Hats: Baby + son/daughter + student + friend + teenager + boyfriend/girlfriend + employee/employer + father/mother + husband/wife + property investor/developer + (parent-in-law + grandparent).
- Age 65+ (post retirement):
Hats: Baby + son/daughter + student + friend + teenager + boyfriend/girlfriend + young adult + employee/employer + father/mother + husband/wife + property investor/developer + parent-in-law + grandparent + (retiree + babysitter ☺).
The list can be different for everyone, also we can further break down each hat into smaller hats, for example, the hat of a property investor can include the following sub-hats:
- Income producer;
- Property researcher;
- Property inspector;
- Mortgage borrower;
- Money manager; etc.
And if we didn’t wear any of these hats properly, we may not be able to wear the hat of a property investor properly either.
2) How much time do we have for each hat?
While we grow older, we pick up more and more hats but do not necessarily drop the old ones sufficiently. We often hear people saying so and so still acts like a child, this is referring to an adult still wearing the hat of a child.
While we have more and more hats to wear, we have less and less time for each hat that we are wearing. Without understanding this, it surely can create lots of disappointments along the way.
If we look at a couple before marriage, they have a lot more time to wear their individual hat as a boyfriend or a girlfriend, but with more hats such as father/mother or other hats from work being added on, they now have less and less time to wear the hat of a boyfriend or a girlfriend.
When we look at a relationship, be it family or business, disappointments usually come from failed expectation from both sides.
Let’s look at a marriage, really with all the hats a couple will be adding during a marriage, we are going to have less and less time to wear the hat of a husband or a wife. In fact, if we look at the time we spend as a husband/wife, excluding the time we spend wearing the hat of a father/mother, or an employee/employer, etc, we will find that we will be doing very well if we can wear our hats as a husband/wife 20% of our time.
But most of us get into a marriage expecting the spouse to be 100% there for us all the time. You don’t hear the wedding celebrant say: “Will you take this man/woman as your lawful husband/wife 20% of the time?” I personally think that will be more helpful question to ask for a marriage as this expectation is more likely to be met, but not sure if anyone would be rational enough go for such a marriage ☺.
However, we may not be able to change the fact that we have less and less time to wear our hats while we are picking up more hats, we can still improve our experience by setting our priorities and the time correctly.
For example, if my spouse and I can only spend 10% of the time wearing the hats of husband/wife, we can plan it in such a way that my 10% and my spouse’s 10% happen to be around the same time, and for the rest of the 90% we are both busy wearing other hats that don’t require the other person to wear the husband/wife hat. Maybe it is a good idea to keep our spouse busy ☺.
We often find ourselves not being able to complete what we started, this is usually not because we didn’t want to complete it when we first committed to it. I find that it is usually because we make the commitment at the time, not remembering all the hats we are already wearing.
One of the easiest ways to handle this is to always think with 5-10% of our time available to do anything, then our estimate will be more realistic and the task is more likely to be completed. Especially if we know we are already wearing, easily, more than 20 hats on a daily basis.
For example, I have seen a lot of property investors start investing in property, but don’t quite make much progress. They ended up sitting on their capacity for a long time and waste time and opportunities. When I look into the reason, I often find that they did start doing research and looking for properties, then all the other hats in their life took over. They completely underestimated the amount of work required to carry out the investment activities in relation to other things they are already doing. With investment not being an immediate urgency, they put it on the backburner.
This is why, when we want to do everything ourselves, we often end up doing nothing properly. With limited time available to us, we can only wear our hats properly if we are willing to let others wear their hats.
3) Hat Conflicts
Another interesting observation is that we often don’t know what hat we are wearing when we are wearing multiple hats at the same time.
Let’s look at a couple of examples:
When husband and wife work in the same business. This applies to doing investing together or a business which employs staff.
Let’s say the husband is the director of the business, the wife is the financial controller in the same business.
When they are at home, they are supposed to wear the hat of a husband or a wife, but what happens if they start talking about work at home? Is the man wearing the hat of a husband or a company director? Is the woman wearing hat of a wife or a company financial controller?
Imagine one evening at home, the husband suddenly wants to know why the wife didn’t complete the financial report for him yesterday as promised. The wife said that she didn’t sleep well last night because the husband forgot to put the kids to bed last night ☺!
To solve this problem, the couple needs to clearly define the boundaries of where and when you wear what hat. For example, you may have a simple rule to not talk about business at home, or not home issues in business. You can further define that no home issues can be used as justification for business issues, and vice versa.
You can also add some flexibility to allow exceptions. For example, when one must bring up a business discussion at home, you will say something like: “Can I put on my business hat for a minute to talk about such and such issue in the business?”
Lending money to family and friends.
When you lend money to your brother to help him out with an investment, are you wearing the hat of a brother or a lender? Which one is more important?
If you think the hat of a brother is more important than the hat of a lender, then when your brother doesn’t pay you back the money, you are unlikely to put him through bankruptcy to try to get your money back.
If you think the hat of a lender is more important than the hat of a brother, when your brother doesn’t pay you back the money, you will exercise the right of a lender and treat him as any other borrowers.
Even if you may give higher priority to the hat of a lender than the hat of a brother, the problem arises if you give higher priority to the hat of a son over the hat of a lender. Imagine your brother somehow manages to gain your mother’s sympathy, she comes and begs you to let your brother go, can you not wear the hat of a son and ignore your mother?
We also need to look at the commercial maturity of your brother here, i.e. how well he understands his hat as a borrower and how much he is prepared to wear it.
If you lend your brother money because you are wearing the hat of a lender, but he believes that you lend him the money because you’re wearing the hat of a loving brother, you can expect him to be upset when you try to put him on default if he doesn’t pay your loan back on time.
It’s complicated if not everyone is on the same page. Very often a perfectly good family gets torn apart from similar situations, not because of money, but because of the participants do not understand what hats they are wearing, and the behavior and responsibilities of such hats.
In a financial arrangement such as a JV or investment opportunity, this applies to not only family and friends, it is also important to anticipate how much the other party understands their hat and its duty and obligation. If you don’t think they are at the same level of understanding as yours, it will be your fault to not clearly document it and have it explained to them and signed off properly.
As a general rule, if family and friends are important to you, you should only lend them money if you are fine when they can’t pay you back. With the exception of the borrower having demonstrated past track records of wearing the borrower’s hat properly.
A few hats of ensuring you reach your financial goals.
After we leave the school systems, very few of us set meaningful goals any more, especially financial goals. We do not hear too many property investors have goals like: “$100k passive net income from my investment properties within 10 years”.
Someone has to wear the hat of a goal setter in the family for setting such a financial goal, otherwise we can go on investing without any direction or accountability. This is often a missing hat from most property investors. When there is no financial goal or no financial accountability to achieve such a goal, most people will never make it. In fact, statistics show that only 3% of the Australian retirees manage to get $50k or more income per year after retirement.
Someone also needs to wear the hat of keeping us accountable and on track in achieving our financial goals, just like the best sportsmen in the world still have their coaches. If we do not see the importance of such a hat, then no one will be wearing it.
A property investor doesn’t wear the hat of a money manager for their investment.
Many property investors accept the fact that they need to wear the hat of a property selector, so they spend most of their time doing research and inspecting properties. Over time, they become very good at doing so, some even develop systems for such a hat.
Let’s say we have a property investor who has selected a lot of good properties, he started to accumulate lots of equity in the portfolio. Not knowing that he has a hat to wear as a money manager, he keeps pulling out equity to buy more properties or spend the equity on other lifestyle items without knowing his real financial position.
After a while without knowing the necessity of the hat for a money manager, this investor can get himself into a position where his cash flow can be very negative, and most of the equity sitting on his properties are capital gain tax he owes to the tax man if he ever needs to sell. If the market turns against him, he can be in a completely stuck position with negative cash flow and not much tax-free equity.
If this investor can see the hat of a money manager, he will carefully set up his money management system first to keep track of all the money coming in and out of his system to ensure that his financial position be always healthy, before he makes any decisions on assets acquisition or lifestyle expenditure.
Career vs Family.
We see this often amongst mothers, they give higher priority to the hat of a mother than the hat of a job. Between work and family, they choose to stay home to look after the kids.
Some people put in extra time and effort to build a career or business at the expense of not spending much time with the family; they give higher priority to the hat of a successful career than the hat of a family.
As long as you do so by choice and mutual agreement with your spouse, you can continue to wear the hats with different priority without causing major issues.
Children vs Spouse.
We often see couple complain about not getting sufficient attention to each other once the kids come along. This is a direct result of the couple unknowingly giving higher priority to the hat of a parent than the hat of a spouse.
To give a bit more priority to the hat of a spouse, you may consider setting aside some dedicated time for each other with no kids, so that the spouse hat can be worn properly.
You may wonder why I talk about this, it seems to have nothing to do with property investing or wealth creation. But harmony at home can create wealth, or at the very least, protect wealth☺.
Doing personal stuff at work, or doing work at home.
Let’s say an IT professional who gets paid by his employer to wear the hat of a software engineer, but he is more interested in creating wealth for his family and spends much of his day looking for properties on the internet at work, we can say he is wearing the hat of a property investor at work when he is supposed to wear the hat of an employee.
You may also see a father doing work at home while trying to play with the kids at the same time. The father is then not wearing the hat of a father, he is still wearing the hat from work.
Not having clearly defined boundaries for time and space to wear certain hats can cause similar confusion. Many self-employed people working from home become much less productive after a while partially because of this reason. They can not wear the hat for the family properly, neither can they wear the hat for work properly, and we know when a person is not 100% there for the things he is doing, he becomes less productive.
Keep changing hats before they are worn properly.
Let’s say we wear the hat of a receptionist, then we should put 100% of our attention to be the best receptionist we can be while we are on the job, before we start wearing other hats in the same business. Otherwise someone else will need to wear our hat to help with reception work.
Let’s say we wear the hat of providing financial security for our family, then we should do our best to look after the family’s financials first, before spending all our money to try save the world when our own family’s financials is in a mess. The stronger we become financially, the more we can help others in the future.
Let’s say we wear the hat of a business operator, before thinking about starting another business, we’d better focus on making the current business sufficiently first.
4) Invisible Hats
One of the most dangerous situations one can get into is not seeing the hats they should be wearing, and what we don’t know but necessary often can cost us dearly.
Let’s look at a couple of examples here:
5) Hat Priority
We often wear many hats during a single day, it is important to know that some of these hats have direct conflict with each other, or at least competing for our limited time resources. This brings up the issue of which hat should be given higher priority under what circumstances.
There are no set rules to determine this, what works for someone else may not work for you.
Let’s look at a couple of examples:
Priority of hats changes with time and circumstances. What is important at the age of 20 can become unimportant at the age of 40. What is high priority when you have only $100 left in your bank account can become low priority when you have $1m.
My experience is that other people will always tell us which hats should have higher priorities for us according to their preference. If you speak to your boss, they will tell you to make your job the highest priority; if you speak to your social or religious group, they will tell you to make their mission the highest priority; if you speak to your spouse, they will tell you to make their needs the highest priority; if you speak to your friends, they will tell you make their parties the highest priority; etc.
I find that the key to resolve the priority issue always comes down to this: “What do you reallywant?”
At the end of the day, we are here to live our life, not anyone else’s life or any kinds of ideas.
Confucius says it well: “I want you to be everything that’s you, deep at the center of your being.”
While your personal preference determines to a large degree how you allocate time for each hat to reflect its priority, but which hat is the most important amongst all?
The answer is always the one you are wearing at this very moment.
6) Wear Your Hats
Wear your hat means wear the hat you are supposed to wear right now, do not wear someone else’s hat, do not wear the hat that is not appropriate for the occasion.
Let’s look at a couple of examples:
7) Make the Hats Known
Let’s say you are wearing the hat of a basketball player, but all your teammates wear the hats of a football player, and the spectators are expecting to watch a football game, can you imagine how awkward that would be?
This happens a lot when we feel sometimes we have done the right thing by others, but others either do not appreciate us or even do the wrong thing by us (at least according to our view point). I find that such situation often comes down to the fact that we are wearing a hat that nobody else knows about, or what we think this hat represents is very different from others’ expectation.
For example, a husband may think a good husband is one who is working very hard to earn an income to provide for the family. So to wear the hat of a husband properly, he spends all his time working day and night.
However, the wife thinks a good husband is one who spends all his spare time helping out with housework and play with the kids, she gives higher priority to that, than the money he can bring home.
Both of these hat definitions are inside of their heads, they have never been written down to compare the difference. You can image how damaging this can be to a relationship. The husband will definitely feel unappreciated and the wife will also feel unsupported. The real problem is that they have not made their particular hat known to one other to seek a mutual agreement in the first place.
So never assume other people share the same understanding of your hats> Writing them down can clarify your thoughts and help others around you to better understand your hats. You can ask them to do the same so that you can understand them better as well.
Life will be a whole lot better for everyone around you, give it a go when you have time, you’ll be surprised by it.
As you can see, it is no easy task to get into a habit of ‘Wearing Proper Hats Properly’ all the time, but the benefit can be enormous. It will help reduce the confusion in our lives and the people around us and make any worthwhile goals a lot more achievable.
So a good little exercise to start building this into a life long habit, is asking ourselves the following questions whenever we can:
“What Hat Am I Wearing At The Moment?”