Most decamillionaires attribute their wealth to owning and investing in their own, rather than in other people’s, businesses, which include the ones listed on the various stock exchanges. The millionaires state that they can control their own businesses, but they can’t control or dictate policy to public corporations, let alone determine prices in the stock market. Most will also tell you they believe they are better able to operate a particular type of business than anyone else. The “particular type” is the key element here. Successful risk takers are market nichers – they do things that others do not do, or, at the very least, they do things in a market area where there are few competitors.
- Dr. Thomas Stanley’s Research via The Millionaire’s Mind
The Secret: Strike Deals Where Everyone Has Limited Downside and Harness the Super Power of Incentive
Some of you have been writing to me privately and asking about the early days when we started out and were trying to build our companies. I thought it would be useful to share some of the things we did during that time that worked out well … and maybe I’ll even talk about those things that didn’t work out so favorably. I hope you find it useful in your own endeavors.
When Aaron and I started our first business years and years ago, we needed to get thousands of products coded and online. That would have taken tens of thousands of dollars in cash upfront with no promise of payout later. That was a risk we weren’t willing to take, so instead, we came up with an idea that mirrored Charlie Munger’s super power of incentive mental model.
We went to a jewelry store and department store to purchase a range of high-end gifts, which we knew would hold their value. This included a diamond and ruby tennis bracelet, bottles of Chanel perfume, a diamond watch, etc.
We then approached several close friends and family members and made them a deal: If they were able to code [x] products successfully within 90 days, and those products were done well enough that they reached [y] in sales, we would give them the items. We made it a competition. That way, they were working as entrepreneurs and knew that if it didn’t work out, they got nothing (no paycheck) but if it did, they won big.
The Moral of the Story
In other words, they had nothing to risk but time and had a shot at getting some fantastic gifts. We had virtually no financial risk because, if things went poorly, we could either return the items or sell them for what we paid. (Always have a financial backup plan.) If things went well (they did), we got to pay them out of profits and not use any of our own cash. Everyone wins.
In the end, everyone was happy. Giving those things away was one of the best experiences I’ve ever had because it felt good to reward those who worked hard and delivered results. I visited one of the workers a few hours ago and was reminded of this program when I saw the gifts. She let me take a photo with my iPhone. I had forgotten what some of the things looked like, but I have to say: Aaron and I have taste.
What I want you to learn from this is how you structure your business deals is almost as important as the investment itself. This is why Benjamin Graham said not to ask if “XYZ” was a good investment, but rather, “on what terms and at what price“. Had I added these people to payroll and created a fixed expense, it could have taken that company down before it got off the ground. We forced the firm to pay for its own expansion out of earnings.
A Secondary Financial Lesson: Know Your Target Audience
(This experience also taught me something that I truly didn’t understand because I was, to be honest, a clueless guy: Many (not all) women love jewelry. I mean love it. They were more excited to receive items like this than cash. I’d want the money. Or stock certificates. I grossly underestimated the power of stereotypes and was promptly rebuked by almost every female in my life with a giant, “duh”. Had I known this, I would have gotten far more pieces like the bracelet shown here, which caused two hardworking, very intelligent women to almost fight. The moral: Know what motivates your target audience. For me, getting paid in stock is a huge incentive. For other people, not so much.)
Years and years ago, Aaron and I came up with an incentive system that caused a group of hard working women to help us launch one of our first businesses. This is the diamond and ruby bracelet that served as one of the prizes to those who delivered the highest performance.
A reader named Medusa wrote me and, to keep it short, explained that I shouldn’t believe people should be rich because the Bible is against rich people, that I was going to die a miserable, lonely old man with no one who loved me because I saved my money instead of spending it, and that after reading a profile I wrote based on Federal Reserve data of the Capitalist Class in the United States, she was starting to consider the possibility that the rich were nothing but oppressors who steal from others instead of producing on their own. This is my response to her.
In the nearly ten years I’ve been writing for one of the biggest financial publications in the world, I have never received a message that so grossly and inaccurately tried to surmise who I am and what my beliefs are. You not only missed the mark, it is as if you boarded a plane to London and ended up in Ulan Bator!
Your Premise is Faulty
Most of your mistake stems from a massive, gargantuan assumption you make that is a constant, underlying theme in almost every sentence you penned: You seem to subscribe to the belief that money equals happiness, or rather, spending money equals happiness. I say that because you basically attempted to eviscerate me for how I lived my early “salad years” working long hours, shopping at Army Supply stores for clothing, and refusing to buy a car. You suffer from the delusion that I must have deprived myself; almost as if you conjured images of Ebeneezer Scrooge counting money alone in a cold money house, too cheap to spring for another shovel of coal in the fire. (more…)
Want to know why the middle class is disappearing despite families now having two people in the work force instead of one? Here is Elizabeth Warren discussing in an hour-long lecture at Berkeley. She is the author of The Two Income Trap.
The only thing I really take issue with is the fact the savings rate is horribly misleading for the reasons I explained in this blog over at About.com. For example, all of the money Warren Buffett has in shares of Berkshire Hathaway, which is nearly $60,000,000,000 never counted as “savings” on his part because it came from capital gains. Likewise, certain retirement contributions, which are now standard, aren’t included. In fact, if Buffett were to spend $10 billion, it would cause the savings rate to be negative if he were the only citizen in an economy because the $60 billion was never counted in the “plus” column. That isn’t economic reality, it is government accounting.
Warren makes great, valid points, which is why I think she she chair the consumer protection agency. To a finance geek like me, lectures like this are the equivalent of a night at the Playboy mansion.
I love and adore this woman. Even though I completely understand why AIG was bailed out at 100 cents on the dollars, I’m glad she is asking questions that need to be posed for the sake of accountability.
(Regarding AIG: Even though it wasn’t morally right that Goldman and other counterparties used Federal money to turn worthless credit default swaps into full value investments, had the Treasury not done that, the entire system would have collapsed instantly. I remember sitting in my office watching the news in real-time on CNBC as the world was falling apart and commercial paper markets had begun to seize. Those who don’t follow finance have no idea how close we came to total, catastrophic meltdown. In this case, the goal was saving the system. The collateral damage was letting AIG counterparties off the hook for bad decisions. Is that preferable? No. Did it have to be done? I believe so.)
There are actually two sizes of the Calvin Klein Obsession for Men factice bottle in existence. This is the larger of the two; we will need to track down the smaller, which measures roughly 10 inches tall.
Through one of the private businesses I control, we have a collectibles portfolio consisting of everything from the Carl Barks artwork I’ve told you about to rare books. One of the things we acquire is the hard-to-find perfume factice bottles that used to be popular at department stores, especially those in the high-end spectrum, back in the 1980’s and even 1990’s. They still exist to some degree but are a dying art, it seems.
We buy these bottles on a targeted basis, have them polished and cleaned, and fill them with liquid matching the original color of the perfume or cologne they were supposed to represent (factices don’t actually contain perfume in the store).
For now, they sit around headquarters and look awesome. They make up a relatively tiny portion of our overall portfolio of businesses, stocks, bonds, etc., but they are fun and I enjoy doing it. The fact they appreciate and can be sold later at a profit makes them even more attractive to me.
Most of the stuff we own isn’t “tangible” in that sense. I mean, if our name is on the deed to a building, you can’t see it during the day unless you drive by it, no one can steal it … it’s just there, sitting. These I can at least see as I’m reading or studying.
Anyway, yesterday, we bought a Calvin Klein Obsession for Men factice. We should receive it in a week, so when we have the final staged pictures, I’ll upload them.
Welcome to the Personal Blog of Joshua Kennon
"Drinking a cup of coffee, working on the iPad, and planning the rest of my night," — joshuakennonAbout This Blog …
I'm a private investor, financial author, and business owner who was the first in his family to attend college, grew up in small farm town, and was determined to study successful men and women so I could retire in my 20's. This is my private blog that covers everything from religion, politics, tax policy, investing, web design, literature, music, and whatever else I feel like discussing. Continue reading ...
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