Book Summary - Early Retirement Extreme by Jacob Fisker

The Lock-In

Most people are trapped in a mass delusion: spending money equals success.

Plato’s Cave

Like Plato’s cave, most people follow a common life track: school → university → career. This path is not efficient.

The cost of specialization: Degrees and specialized careers are fragile to change. Generalists fare better.

Corporate ladder reality: The ladder is more like a pyramid. Survivorship bias hides this truth.

The Problem with Personal Finance

Cash flow crisis: Single income stream. Many debts.

Consumer debt destroys wealth: Unlike business debt, consumer debt does not generate income. Major consumer debt means borrowing from an uncertain future.

No savings buffer: Most households save nearly nothing.

Retirement: A Modern Invention

Retirement is a relatively new phenomenon from the 20th century. Most early retirement resembles a long vacation. A net drain on society’s productivity, just spending past accumulated wealth.

Breaking Out of the Lock-In

• Reduce waste and increase efficiency. Live at lower cost with the same benefits.
• Invest the gains from waste reduction in businesses.
• Find something meaningful to do instead of traditional work.

Economic Degrees of Freedom

To understand a system, identify its degrees of freedom and constraints.

The Coupling Graph

We analyze economics using two axes:

Horizontal axis (Coupling): From loose to tight. Loosely coupled systems are less likely to fail.

Vertical axis (Organization): From linear to non-linear. Non-linear feedback creates convex payoffs.

Four Types of Workers

Each type has different risks, rewards, and culture:

Salary Man (Tight/Linear)

Tied to one employer. Fragile when things change. Rewards scale linearly with effort, or less.

• Use options others create, but don’t create new ones
• Work and consumption are well controlled. A cog in the machine.
• All income goes to spending. No savings buffer.

Working Man (Loose/Linear)

Freelancers with uncertain income but less risk. Linear rewards.

• Keep emergency funds because income varies
• Work for many clients, not just one employer
• Spend like salary men despite variable income

Business Man (Tight/Non-Linear)

Owns one or more businesses. Personal cash flow is tiny compared to business cash flow under their control.

• Tight coupling to one or few businesses. Convex payoff.
• Job is solving problems using assets and other people.
• Must solve things quickly due to competition.

Renaissance Man (Loose/Non-Linear)

A combination of all three types.

• Competent in many fields. Can take full-time work when needed.
• Generalist with many vocational skills. Picks up work based on supply and demand.
• Vast knowledge and experience solving complex problems efficiently.
• Does many things in-house: taxes, repairs, painting, cooking. This cuts cash outflows considerably.
• Owns assets and investments in various businesses.
• Can make or do anything. A local leader and inspiration to others.

Succession and Cycles of Change

Different types dominate at different stages. Like species in nature:

• Each type is adapted to thrive in a specific environment
• When conditions change, the existing type gets outcompeted by one better adapted to the new conditions
• Succession occurs because the dominance of one type gradually changes the environment

Ergodicity and Destiny

What is ergodicity? Space average equals time average. If you look at one point over time, you get the same answer as looking at all space at one time.

However, Jacob uses ergodicity slightly differently: With a certain set of behaviors, over time, that species will end up where it deserves. Luck plays a part in the short term, but not long term.

Building agency: To achieve long-term goals, we need agency to follow a set of behaviors through habit or sheer willpower over time.

Agency is the attitude that any problem can be fixed, given enough time, effort, and determination. Agency transfers across different fields. To build it, grit through something very difficult at least once in your life.

Our Current World: Climax Stage

We have an economic model based on pulling resources from the ground, turning them into unnecessary products, getting people to buy them, then getting people to throw them away for newer products. This kind of GDP is not sustainable.

The Renaissance Ideal

Human Capital and Personal Assets

The Renaissance man builds capabilities across four domains:

Physiological

• Maintain optimal physical and mental health
• Know how the human body functions and adapts to stress, overeating, lack of exercise, and their opposites
• Know which foods promote health and which destroy it
• Maintain good habits. Know how to preserve food and tell when food is spoiled.
• Be able to compete in local sports competitions
• Be able to perform physically while exhausted, hungry, or tired. Test: carrying an unconscious person from a burning house, or pulling yourself up and hanging from a gutter.
• Know at least basic first aid

Intellectual

• Prioritize information relevance. Quickly research and find relevant information across many areas. Learn independently with genuine interest.
• Have enough generalized knowledge to understand new information and place it within a mental framework, model, or procedure. Use it to ask further questions.
• Recognize which problems the model applies to. Take a solution from one problem, generalize it, and apply it to another problem.
• Critically analyze models, refine them, and combine different models to achieve objectives. Practice critical thinking in all aspects of life to reach rational certainty. Be open to new ideas but accept nothing without examination.
• Synthesize interdisciplinary information and connect similarities that aren’t immediately apparent. Discover new models and procedures.
• Evaluate different methods, models, and procedures. Rank them by utility. Pick the best one while recognizing the value of other methods. Pursue relevant and correct knowledge persistently. Master the fundamentals.

Economic

• Understand the difference between price and value. Value is psychological. Price is determined by the market.
• Consider more than immediate consequences. Think about future consequences: opportunity cost and time-value of money. Learn to see the unseen.
• Consider consequences for all people, not just one group.
• Realize that economic agents represent special interests. They interpret situations according to their own interests or political views.
• Understand the difference between assets and liabilities. Understand leverage and cash flows. Learn what is an investment (income-generating asset) and what is not (items for personal use).
• Know the law of supply and demand. Know the difference between savings and investments, and between present and future value.
• Understand how stock, bond, and real estate markets work, both in theory and practice.
• Be able to do your own tax return, make a budget, and balance a checkbook.

Emotional

• Appraise value in all matters to make sound decisions
• Never waste time, money, effort, or resources
• Resist emotional manipulation. Avoid wishful, magical thinking. Don’t believe things are true because you want them to be true. Don’t believe you can influence external events by thinking positively about them.
• Have strong character. Persist. Cope with adversity. Be resistant to stress. Stay calm. Displace frustration.
• Develop a passion. Appreciate the arts and what it means to be human, not just a “human resource.”
• Be empathetic. Understand that people and situations are complex.
• Make social connections and increase the value of interpersonal relationships
• Patiently await a better solution. Be willing to compromise and accept something close, but not exactly your ideal.

Social

• Get to know people outside your profession, hobby, religion, political party, socioeconomic stratum, and country
• Start or join a co-op. This can be anything from buying groceries to participating in a tool shop to sharing movies with others.
• Learn how to sell, barter, swap, and give things away
• Learn how to network and build your social capital
• Get involved in politics on some level

Technical

• Have knowledge of different professions’ skills to critically judge the services of professionals
• Have a working understanding of all the technology you use to understand its limits and benefits
• Learn how to select optimal tools for your use, maintain them, and repair them when they break down
• Learn a common trade to barter your skills for other things

Ecological

• Know the names of 5 grasses, 5 birds, 5 trees, etc. local to your area. Be able to recognize them.
• Know which food is in season and how much oil, water, and fertilizer it takes to grow or raise food out of season or location. Understand Liebig’s Law of the minimum.
• Grow and sustain a garden without using pesticides, hybrid seeds, or chemical fertilizer. A garden achieves maximum integrity when it is in balance, and when growth is stable and resilient without ongoing external interference.
• Promote functional diversity to retain adaptive capacity. Allow evolution to happen when the environment changes. Consider adaptive and evolutionary potential before interfering. Action always has reactions. Action is not always a good idea.
• Always consider the system. Understand both the parts and the whole. No parts exist without the whole. The whole doesn’t exist without the parts. Everything relates to everything else, mostly indirectly. Changing one part changes the whole.
• Recognize multiple bottom lines, flows, and balances in terms of primary, secondary, and tertiary consumers, producers, and decomposers.
• Use the maximum power principle: systems strive to maximize the rate of useful work. Don’t waste energy to the environment.
• Understand the concept of characteristic scales in terms of change and the effect of limits on competition and cooperation. Understand the difference between positive and negative feedbacks (both are needed) and how linking feedbacks lead to cycles, runaways, or overshoots.
• Study the structure and principles of different systems to build a collection of models for understanding other systems. ### The Renaissance Education

Principles over techniques: Fundamental principles, concepts, or structures are more important than specific techniques. Principles always apply to other fields.

Learning by doing: People remember most of what they do, some of what they say, but little of what they see or hear. Therefore, do things. In cooking, leave ingredients out or substitute new ones to see what happens. In sports, practice unmastered techniques actively and combine them with other techniques. In finance, try investing in different things.

Gauging Mastery

Time-based: 1,000 hours to Journeyman. 10,000 hours to Expert.

Progression: Copying → Comparing → Compiling (collecting) → Computing (pairing) → Coordinating (refining) → Creating (synthesis)

Decoupling and Increasing Complexity

Increasing complexity means higher capability, often at the cost of higher maintenance or lost responsiveness to change.

Simplicity, often by decoupling several joined variables, makes the system more predictable and easier to maintain or change. An even better way is to use abstractions (lossless compression) to maintain capability and simplify systems.

Complex systems, if designed well, are more resilient than simple systems.

Work switching has a cost, depending on the nature of work. Managers versus hackers.

Strategy, Tactics, and Guiding Principles

Plan vs Tactic vs Strategy

Tactic: Detailed concrete steps to reach a goal.

Plan: A string of actions following a certain path. Get a single error, stop.

Strategy: A web of actions. A line gets cut, move to another line toward the goal.

Strategic Principles

Modular design: Decouple and switch between modules easily. This decreases dependencies and increases resiliency. Example: being capable of getting more than one job (income module), or having several paths to get what you want (expense module): haircut from a salon, doing it yourself, or knowing a friend with the skill.

Work to learn: Don’t work to earn money. Work to learn new skills, gain new connections, and create new opportunities.

Valuable hobbies: Focus on hobbies and projects that are at least free or can produce value or earn money.

Holon: Prefer strong coupling within the project or module and loose or no coupling to the external world.

Keep modules simple: Make modules simple, small, and not time-critical as much as possible. You can wait to buy stuff at a better price.

Vector thinking: Each action is a vector in multi-dimensional goal space (one goal per axis). Each second or nth order effect changes the direction and magnitude of that vector. To simplify, think of the effect as positive or negative to each goal and combine them.

Goals as properties: Define goals as properties: losing or saving money, decreasing or increasing health, etc.

Tactical Principles

• Create a list of needs or wants, ranked by value and preference
• Pick the ranked item suitable to the resource at hand
• Fulfill them with an appropriate response, using minimum resources to achieve them. Just right.

A Renaissance Lifestyle

The strategy for living like a Renaissance man:

• Reduce wants and needs from the marketplace to a minimum. Decouple the buy-work connection.
• Decrease the volume and size but increase the sophistication of your activities and possessions.
• Measure prosperity by less activity, not more. Do fewer useless things.
• Work for money for no more than five years of your life or five hours a week.
• Avoid generating waste. Find ways to use the waste of others.
• Learn to use the system to your advantage, but don’t be evil.
• Serve yourself rather than having others serve you. Instead, help them.
• Keep running costs down but pay for value.
• Maintain health to avoid the personal and monetary cost of sickness.
• Build up the capital to live as a capitalist or the skills to always find a new job.
• Focus on developing skills rather than on passive entertainment.
• Gain maximum satisfaction with minimum expenditure of money and energy. ### Things

Why possessions are mendokusai (troublesome): They cost money, take up space, require maintenance, may lead to getting more things, can get stolen, and are hard to get rid of.

What should we own: Things that have suitable quality and low lifetime cost. Durable. Small or lightweight. Easy to maintain and get rid of.

Annual cost = (bought price - used price) / years used

Exception: Do invest in things you use often.

Housing

• Get the smallest unit that is comfortable to you
• Consider time-usage of rooms. Example: bedroom gets used 8/24 = 33% of the time.
• Location: Very close to grocery outlet and work. Walking distance preferred.
• Japan: Safety from natural disasters is paramount.
• Other: Crime or theft safety, conditions at night, electricity or internet uptime, etc.

Work

• If you have to work, remote work or flexible hours work is ideal
• Consider moving close to work as much as possible, if needed

Food Supply

• Buy bulk, once a month, seasonal ingredients
• Grow your own food (permaculture)

Foundations of Economics and Finance

The Ecosystem Loop

Complete ecosystem: Resources → Producers → Consumers → Decomposers

Modern economics: Only Producers → Consumers

The economy can’t keep growing forever without killing itself if the cycle isn’t completed.

The ERE Goal

The key goal for an Early Retirement Extreme investor is to create an ecosystem or asset that can sustain itself plus the investor.

The Workforce Reality

Since full-salaried pay often has more to do with negotiation skills, politics, or tenure rather than productivity, the workforce divides into three types:

• Work horses - Clueless, doing all the work
• Show horses - Political, focused on appearances
• Horses’ asses - Doing minimum work since pay is the same

Accumulation Phase

Full-time salaried work is still good for the fund accumulating phase, but optimize the trade-off for time and freedom.

Key Numbers

30 years of expenses saved and Safe Withdrawal Rate (SWR) of 3% for long-term sustainability.

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