Investing From a Place of Fear

A client emailed to ask me about a book they had seen. It talked about how the only way to invest was to put money into gold, how house prices were still not done falling, but that REITs were the way to go. That the dollar was about to collapse because of the government printing money and gold was the place to be. They also said to turn your dollars into other currencies (Canadian dollars) since the dollar was going to be unstable. Here is the response I wrote back, and thought some of you might find it interesting:


The premises are not dissimilar from what a dozen pundits are throwing out there. Most mainstream folks will agree, conceptually, with some of his thoughts. The difference is that he ignores certain checks and balances that would come into play so he can take the thoughts to their theoretical extremes (you know how well fear sells!). But some thoughts I have on it are this:


Long-Term Treasuries: Obviously rates are going to go up. They are at nearly zero which means they have to go up at some point. But we know this, which is why most of our bond portfolios are more heavily weighted toward shorter duration bonds which have less timing risk. But in the meantime, we still want some longer term ones because they are yielding pretty decent. Running away from completely from an asset class just seems extreme to me.


Real Estate: This one confuses me, he says the real estate is going to drop, but recommends you buy REITs? Sounds like a great hedge on being right no matter what happens! But yes, I do think that there is still some instability in residential real estate but that it is still a historic low time. So not over investing in real estate right is a good idea, but the low prices can still make it an attractive long-term investment.


US Currency: The scale of the capital market in America, and for Dollars, is more vast than most people can even comprehend. I do think there will be inflation coming, but that inflation will not necessarily be just in dollars. Europe is going to inflate their way out of debt as well and the emerging economies are already showing some signs of overheating (China has been steadily increasing its core interest rate recently to combat inflation.) The point is, America is still the largest market for basically every economy on earth. Looking at Canada is a great example. How much of Canada’s economy is based on exporting to the US? And if the dollar “weakens” against other goods, then all it does it make it more profitable to produce here instead of importing (which, conversely, will create jobs and spending IN the US, which strengthens the economy and the dollar). To not risk collapsing their economy, other countries will have to weaken their currency to match the dollar, to compete with our local manufactures. And this story repeats all over the world.


Gold can be a great investment, but the price of gold has two components: hard demand and speculative demand. Hard demand is the demand for real uses (e.g. manufacturing). Speculative demand is the amount that speculators have bid the price up. It has been a little while, but the last time I saw some research nearly 80% of the price of gold was based on speculative demand, not hard demand. So, it might be a great investment, but it can be a HIGHLY volatile investment. This is neither good nor bad, and it should (and is) a part of your portfolio. But we cannot put a huge chunk of your money into something that can turn on a dime like gold can. Speculators can change their mind quick and when they do, that price of gold can drop to the hard demand lever QUICK.


These folks like to use fear and statistics to sound academic and sell books. And MANY of the things he is pointing out are correct. But it is rarely, if ever, the whole story. I like to take a step back when I get entrenched in these types of things and do a reality check. What country has one of the most productive work forces? What country has one of the highest standards of living? What country has the largest, bar none, capital markets? Which country is still one of the most advanced in research and technology? What country has the largest economy, by orders of magnitude, than any other country in the world? (Fun fact, if you took New York City by itself, just within the city limit, its GDP would make it 13th largest economy in the WORLD. Only 12 COUNTRIES have a larger economy than the city of New York.)


My point being: This guy’s investments could be a good plan, but they are a risky plan because they are an extreme bet on one thing. I always advocate a more measured approach. Which is why you should have some commodities, but are not 40% in gold, which is why your bonds should probably be weighted towards shorter term bonds, and why you might have a strong showing in international equities, as well as US equities. But people should not bet the farm on one idea.


And if America fails, your money won’t be worth anything anyways, so I wouldn’t worry about it! I would say that if you want to read the book, go for it. More education can’t hurt, just make sure to take it with a grain of salt. There are lots of great books out there that can help you understand this stuff better. I usually like to go right to source though, and read pure economics books so I can interpret data for myself.


Hope this helps!


Influential Books

I was asked a great question by @twestonkendall on twitter the other day. He asked me what the top three business book are that have influenced how I think about business. My first reaction was to refer him to my Guru reading list on my website. But then I thought about it a little more. I created the reading list on my site to offer resources to people running, or thinking of running, small businesses. But I think that Todd was asking a different question. Maybe he wasn’t and I completely misread it, but I thought it had a little different flavor.


The books that influenced the way I think are not necessarily books designed as resources for small business owners. So here, in no particular order, are the books that have shaped the way I look at business. I did cheat a little. I made my first list and just couldn’t trim it down to any less than four. So there.


E-Myth Revisited By Michael Gerber

This is a great book that really helps to illustrate the difference between the doing the work side of a business and the business side of running a business. A GREAT read for people thinking about running a business.


Freakonomics by Steven Levitt and Stephen Dubner

I really loved this book. It is a great showcase of how much of a social science economics really is. A shockingly large number of seemingly irrational actions are explained by the art (and science) of economics. It would serve anyone well to understand this and to keep it in mind.


Economics in One Lesson by Henry Hazlitt

A great primer on the more theoretical side of economics. Where Freakonomics shows you how the science can be applied to random, everyday scenarios, this book gives a great primer on most of the major ideas and concepts in economics. A must read for any business person.


Syrup by Maxx Barry

This is a fiction book, which might make you wonder why it is on this list. But anyone in business knows that there is one rule. All the best ideas and plans and theories generally don’t survive first contact with the customer. Enter Scat, the main character. His story proves that “fake it until you make it” is perfectly legitimate and is really, at the end of the day, what we are all doing. Sometimes it works out, sometimes it doesn’t. Sometimes it works and then you get screwed. You just never know.


So there you go. Obviously nearly every book I have read has influenced me in some way. But these four have had the biggest impact.



The Immutable Law of Business

I really want to take time out of my day to talk to you guys about something very serious. It occurred to me today that so many people forget that the risk/reward trade-off is actually the immutable law of business. I have talked about risk and reward before. But for a business owner it goes far beyond its normal meaning of the risk/reward trade-off in investments. We all know that, all other things being equal, a riskier investment should produce a higher potential yield (note, this does NOT mean that it ALWAYS has a higher return). And in investing, we don’t care about absolute returns, we only care about risk-adjusted returns. Any investment that adequately compensates you for the risk you take is a good investment.

But this same trade-off pops up all the time in your business.

There are some easy examples:

You can expand your product line or expand geographically. But you might fail in that region or with that product. But if it pays off, you might make even more money. Risk = Reward

A little less obvious, but hiring is always a crap shoot. You never know how well someone is going to turn out. But if you always hire the safest person and you do hours of due diligence, the odds say that whoever you hire will perform about how you expect. But you decide to take a flier on the smart kid that walks in and knocks your socks off? Might pay off HUGE (or might not). Risk = Reward

Capital Structure
Anytime you convert cash into any other type of asset you take a risk. Cash is the only 100% liquid asset. So every time you buy inventory you are taking a risk. You might think that you have to buy inventory. And, generally speaking, you do. But how much? People are REALLY bad at pricing risk. Maybe the risk of getting stuck with excess inventory (which happens ALL the time) is greater than the risk of what happens if you run out of something. The risk/reward trade-off also applies to leverage. All leverage is risk. Anytime you take out ANY sort of loan you are saying, “I don’t have money now, but I WILL have it later.” The risk is maybe you won’t. So if you borrow to fund expansion or new investment, that might make sense. You increase the chance you will have more money by investing and opening new channels. If you need a credit line to fund operations then what makes you think you are going to have money later? This scenario is much riskier.

Every time you agree to work with a new customer you are taking a risk. I know. I’ll pause so you can sputter your disbelief and “But my business is different” crap…………done? OK. Yes, you have BAD customers. Right now, at this moment, you have customers of your business that you shouldn’t. You have customers that are not a good fit. That are not producing the profit level they should be. You have customers that are sucking time, attention, money, or energy (or all of these) out of proportion to their payment to you. Keeping them is a risk. You risk not being able to take on a better customer. You risk being stuck doing work you don’t want to be doing. Firing them is also a risk. What if you don’t replace the revenue? But the immutable laws hold here as well. Doing the riskier thing is the only way that you will have a BIG pay off. You won’t take your business to the next level by doing what you have always done. Risk = Reward

Tax Planning
I know, I almost lost you on customers, but now you think I have completely lost my marbles. “How can tax planning be a risk reward scenario? It is what it is, right?”

Oh, you are SO wrong.

The basic premise of all taxation is that everything that is a deduction is deductible because you removed some measure of control of the money. If you want to put money in the bank, you will pay tax on that money. Period. That’s the way the system works. So, if you are saving for retirement (or whatever) you can do what I call the “brute force” approach, which means you make money, have profit, pay tax, and bank what is left over. And, if you have a successful enough business, you might get to your goal. And you will have almost no risk. All that profit in the bank is yours to do whatever you want with. No one can touch it, you can’t lose it (well….).

But if we add risk, you could have even more. Sure, I know you don’t like the idea of putting money away into a complex investment that you barely understand or in an account that you can only invest certain ways and can’t touch until you are 60. You run the risk that it could blow up on you. But you could also have a LOT more money for it! Maybe you expect to have 50k of profit this year. Or maybe its 250k or 1,000k. Whatever. People always say, “I want to pay no tax. I hate paying tax!” So I show them how to pay no tax. And it involves legal structures, deferred accounts, and investment products (that have a cost). You would be amazed how many times I have prepared a brilliant plan to pay no taxes and the owners are too afraid to do it. They freeze, pay their tax, and do nothing.

Nothing ventured. Nothing gained.

I get it. It’s big, it’s complex, it looks expensive. You aren’t sure you understand it all. What if you need the money? These are all risks you agree to take. But in this area, you can save a LOT of money. Top tax rates are somewhere around 45% (in California where I practice the most) and going up from there soon. Investing 250k creates MUCH smaller numbers than investing with 500k. And guess what? All that additional reward? Guess how you got it …

I promise it wasn’t without additional risk.

The Immutable Law of Business

What do I do First?

I have people ask me this all the time.

I have started a business, so what do I now? What do I do first?

I always have a hard time answering this question. Which is odd. I mean, all I do is business! How can I NOT know the first step? I really started to question my abilities recently, because I struggled so much with this question.


But then it hit me.


You started a business but are still waiting for someone to tell you what to do.

We all know the stories about the VP in the corner office. Your oh-so-wonderful boss. How he never does any “real” work, he just sits around bothering people. Or the small business owner who is only in the office 20 or 30 hours a week while you slave away at the phones or the computer.

These people are missing a key point of the process. They are doing the work. But running a business means having to decide what work to do. That is the most common thing I see among unsuccessful business owners. They never did the BUSINESS side of their business.

You know what that VP is doing all day? Deciding what the company should be doing. And when. And why. And who should do it. And I guarantee that some days he wishes he could just show up to work, mindlessly pound away on a keyboard doing whatever it is someone else told him to do. He envies the low stress job you have, that allows you to leave it all at the office when you clock out. Trust Me.

I have made lots of decisions as the manager of my company. I was wrong, a LOT. But I was right as well (more often than wrong, I hope!). But when you have to look at someone across a table and tell them they are fired, and you know it’s because you made a pivot the wrong way, then you will truly understand what it means to run a business. This one person might be losing their livelihood, but you have 10 other people who still work for you and you need to protect their livelihood. And having the guts to make that call is what being the boss is all about. There is no manual to running a business. You DON’T KNOW what to do most of the time. But you gather data, think it over, and make a call. Sometimes you are right, and sometimes you are wrong. But I promise that you will never have the decision made for you. Hell, you likely wont even know what the decision IS.




What should you do first?


Hell if I know.




And if you can’t? Then you aren’t running a business, friend.


Crush It – Book Review

I recently finished Crush It by Gary Vaynerchuk. My first comment, it is a really good book. I really enjoyed it. One of the things I liked to most about it, which is the same thing I like about Mr. Vaynerchuk to begin with, is his style is very real and straight forward. I also really enjoyed how positive Gary is in everything he does and how great he is at inspiring people. It really is one of his greatest talents.

The book is about the power of personal brands and how to create them using social media. He starts by telling his story, which is great. Then he goes into talking about how, in culture that social media has created, you can monetize any passion. The best part about the book is that it is equal parts inspirational self-help (which I think can be valuable when done right) and practical guide.

But then, we would expect nothing less from Gary.

I am adding this to the Guru reading list, but with a caveat. It really is a designed for a sole proprietor or a lifestyle type business. If you run a larger scale enterprise, there might be better inspirational only books. Let your marketing department handle the social media stuff. But this would be a good guide for you to hand them.