The Worst Business Advice I’ve Read In a Long Time
One of the projects on my personal study plate is examining the various business models of multi-level marketing systems that rely, in part, on referral businesses paying tiered levels of commissions on sub-distributorships brought into the enterprise by existing dealers; companies like Amway, Mary Kay, and Herbalife. In addition to the data itself, I’m going through both positive and negative commentary written by proponents and adversaries. It’s one of those areas of the economy I’ve never given much thought so it seems like I should be aware of the models employed, if only to have a future mental reference when analyzing certain firms.
A passage in a book from the mid-1980s made me laugh out loud at my desk in the middle of the night like I haven’t laughed in a very long time. It was talking about how Amway distributors were encouraged to clear out the “Negative” in their life, including competing products.
“When we were new in the business, my sponsor came to our house and went into our bathroom, and found my tube of Crest. I didn’t like Amway toothpaste, and I decided that I wasn’t going to use it. And she wrote on the mirror with the Crest, ‘I love Amway toothpaste.’ Then she came out and said, ‘I want you to go look in your mirror.’ Well, that day I learned my lesson.”
“Tide won’t put your kids through college. Tide won’t buy you a Cadillac and a new home. Tide won’t give you a retirement income. So get rid of it.” (emphasis added)
I haven’t laughed at something that absurd in a long time. That was 1985 and talking about events going back to the late 1970s. The case study I did on Procter & Gamble, Tide and Crest’s parent company, covered a 20-year period starting in 1991. A single $100,000 investment grew into $1,182,131 assuming no dividend reinvestment on the $243,461 in cash you were mailed over the years.
With the dividend hikes since I posted that case study, you’d have collected almost another six figures and your projected 12-month cash income from dividends alone would be around $37,355. Not to mention you’d still be sitting on seven-figures worth of shares in your bank vault. And you wouldn’t have had to do a bit of work; the professional management in place is paid to show up and figure out how to sell for you as you provided the money.
If someone who said that in the 1970s had bought shares of Procter & Gamble, their results would be many times the wealth creation from that 1991 case study because of how compounding works. Add another 15-20 years onto the timetable and crazy things happen. Their grandchildren would be paying for college from their share of the inheritance and the original owners would be retired on a beach somewhere. Markups and commissions are nice, but owning the enterprise itself is better if the business is a good one with high returns on capital.
When talking about a good business, I’ll take true ownership in the form of this any day, and every time, all factors equal:
Over a non-ownership stream of these coming my way:
The former produces checks to which I’m legally entitled without having to do any selling myself, let alone by putting pressure on friends and family. I make money from people I don’t even know; billions of folks across the planet I’ll never even meet. They don’t have to like me. In fact, they can outright hate me, and I still get their cash because they aren’t thinking about me when they walk into the local convenience store and pick up mouthwash or window cleaner.
But the real advantage is that true equity ownership accrues a capitalized value to that earnings power base. If I were going to sell toothpaste, I would either buy ownership in the toothpaste company, or setup a toothpaste company and issue shares to myself. I want equity profits unless the business generates sub-par returns on non-leveraged capital, in which case I want to take my cash and run. I want to own the toothpaste trademark. I want to be the one hiring the sales people. That’s where all the real money is. If it’s a real business, earning real profits, valued at a good price, put my name on the front of a stock certificate instead of the front of a check.
“Tide won’t give you retirement income” …. I can’t stop laughing! On the other hand, the ignorance is almost painful. I feel bad for the guy who believed this. Give me Clorox. Give me Colgate-Palmolive. Give me Procter & Gamble. Give me Unilever. Give me Coca-Cola. Give me Nestle. No, they are not guaranteed to do well – any company can lose money or get wiped out – but if they all collapse permanently, life as we know it has ended, anyway, so on a group basis they, and companies like them, are probably the closest thing to a good 25+ year bet you’re going to find provided the acquisition cost is fair and the holdings diversified.