“All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.” – Sun Tzu

 

Principles of Wealth #34* 

According to the financial planning community, asset allocation is the single most important factor in building wealth. This is misleading.  The most important factor is actually risk management. Asset allocation is just a part of risk management. The other two parts are position sizing and loss limitation.

 Risk is an element of every investment transaction. But if you know what you’re doing, most of it is unnecessary. And by knowing what you’re doing, I mean following the “best practices” I’ve discovered over the years.

 

Asset Allocation

Asset allocation means dividing your investment capital into different asset classes. By doing that, if one asset class tumbles, you have money invested in other classes that may not drop as fast… or may hold strong… or may even increase in value.

To show you how important asset allocation is, let’s look at would have happened to two investors in 2008.

Our first investor is “Joe.” He had 100% of his money invested in the stock market in 2008. Let’s say $100,000. In other words, he had no diversified asset allocation plan, and his money was wide open to stock market volatility. So when the S&P 500 dropped 37% that year, Joe lost $37,000.

Our second investor, “Nancy,” also had $100,000 invested. But she took a more conservative approach. She followed the traditional Wall Street asset allocation model – 60% in stocks and 40% in bonds.

Like Joe, Nancy lost some money when the S&P 500 dropped 37%. But she had fewer of her dollars in the stock market. Therefore, she lost less than Joe did. That alone makes her strategy superior. But it gets better…

Bonds are typically inversely correlated to stocks. And in 2008, when the stock market was plummeting, bonds rose 5%. So while 60% of Nancy’s money dropped 37% (her stock market losses), the other 40% of her money rose 5% (her bond gains). So Nancy actually lost only 20% of her money in 2008, or $20,000.

Had you invested your money with the “average” financial planner back then, this would have likely been your outcome. That’s why the two-asset class “Wall Street” model is far from optimal. And that’s why I recommend reducing your exposure to stock market risk with an expanded asset-allocation strategy that includes such things as real estate, gold, cash, and entrepreneurial businesses.

 

Position Sizing

Position sizing is a simple strategy dressed up in a fancy name. The idea here is to limit risk by deciding you won’t put more than $X or X% of your capital in any single investment.

Where asset allocation reduces overall risk, position sizing reduces the risk within each asset class.

If, for example, you had $800,000, you might put $100,000 in each of eight asset classes. That’s asset allocation. Position sizing would determine how you divide the $100,000 in each asset class between individual investments.

You might say that you’ll invest no more than $8,000 in any one deal. $8,000 is 1% of $800,000. So if one investment of $8,000 went down to zero, your Free Net Wealth ($800,000) would go down by only 1%.

Like asset allocation, position sizing is a way for conservative investors to protect themselves from catastrophic losses. I’m a strong proponent of position sizing. This is an important safeguard – especially if you ever find yourself wanting to “go big” on some gamble.

Keep this in mind: The smaller you can make your position limit, the safer you will be. My position limit is 1% of my Free Net Wealth on many of my stock investments. But when you are starting out, it will be hard to set such a small limit. A good rule of thumb for most people is 3%-5%.

 

Loss Limitation

When you use position sizing to buy stocks, you are limiting your potential losses to a percentage of your portfolio (1% for me – maybe 3%-5% for you). But you can further reduce your risk by attaching a “stop loss” to each stock you buy.

A stop loss predetermines the price at which you will sell a stock if its price drops that low. If, for example, you set a 25% stop loss on a $20 stock, you will sell it if its price drops to $15. This reduces your risk for that stock to 25% of its position size.

Getting back to our earlier example and assuming that you have $8,000 invested in the stock (your position limit)… If the stock’s value dropped 25% to $6,000, you would sell it. You would take a loss of $2,000 and no more. And if, as in our earlier example, you had a total of $800,000 invested, your total loss on that investment would be only one-quarter of 1% of your Free Net Wealth.

Stop losses allow you to control what you are willing to lose. They remove emotion (an investor’s great enemy) from consideration when a stock, a group of stocks – or even the entire stock market – is tumbling.

And as you can see, when you combine stop-loss limits with position sizing, you reduce risk dramatically.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost. 

 

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 If you are not happy now with what you’ve got, you won’t be happy later if you get more.” – Michael Masterson

Just One Thing: You’re Not a Pharaoh. Don’t Act Like One

Several years ago, The New Yorker published a cartoon of a man on his deathbed saying, “I wish I’d bought more crap.”

That says it, don’t you think?

The pharaohs apparently believed they could take it all with them. So they did. But when their bodies were found years later – as desiccated, linen-wrapped bones – their treasures were gone. Plundered.

That’s the thing about Mother Time. She’s a Socialist. Sooner or later, she’s going to put your hard-earned things into the hands of others. Whether you like it or not.

You can write a will. You can spend a small fortune on an estate plan that will ensure, for some amount of time, what will happen with your “things.”

But even the best legal work can be thwarted by legal work that comes later, when you are no longer around.

The problem is people. As the late, great Joe Gondolfo, life insurance salesman extraordinaire, used to say from the podium: “People change when people die.”

* You leave all your money to rebuild the local library, where you volunteered during your retirement. A year after you are gone, there is a change in the board. The new board decides to sell the library and invest the proceeds in a technology school. “Books are passé,” the board president says.

* You have three rare coin collections, each worth $150,000. You leave one to each of your children. By the time you go, one is worth $300,000, another is still worth $150,000, and the third has depreciated by 300%. Your kids are unhappy with the situation. They secretly blame you.

Your financial life can and should be divided into two parts:

Part 1. Earning money to acquire things you need, and

Part 2. Deciding what to do with those things when you no longer need them.

Most people put off Part 2 as long as they possibly can, until death is knocking at the door. Many never face up to Part 2. They go to their graves owning everything – the house, the valuables, and the money.

This is not a good idea. I’m assuming you know that, so I won’t belabor the point here.

My view is this: Once you have bought all the things you need to live comfortably, additional buying will be counterproductive. You will be spending money on things you don’t need for the very ephemeral dose of dopamine it will give you. But buying them won’t give you half the pleasure it once did… when you needed them.

Moreover, these “things” will start to accumulate – in your basement and attic and closets. You may even rent storage units to hold onto them.

And then what? You die and Mother Time distributes them as she sees fit. Your wishes no longer matter. And she’s a Socialist.

There is only one thing you can do about this. No, two:

  1. Stop accumulating things you don’t need.
  2. Start giving away the accumulated things you don’t need now.

So before you buy anything else, ask yourself these questions:

* Am I going to actually use this thing?

* How much pleasure or satisfaction will it give me?

* Is there something else I can do with the money that would give me greater pleasure?

If, after answering these questions, you decide to buy the thing in question, ask yourself this: Who should I leave it to after I’ve stopped using it?

Then don’t wait till you die to give that thing away. Give it away the moment you stop using it.

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“The most important secrets of every business are almost always invisible to outsiders – especially investors.” – Michael Masterson

Just One Thing: The Economics of Overseas Resort Development in One Lesson 

A colleague writes:

An associate I’ve worked with for a while and come to know and respect has developed a high-quality, eco-friendly project on the Pacific coast of Costa Rica. They are well along and are now raising equity capital to build out the central village. They are in active discussions with some boutique hotel companies as well.  

They have around $1.5M committed toward the $5M raise for the village construction. 

Great location, top surf break, centralized solar power system coming in, mini-farm, beach club, etc. 

I can attest to the intelligence and integrity of the co-founder.  

They are seeking investors, but also are keen to make deals with publishers to promote lot sales. Possibly even an exclusive. There are multiple phases so quite a bit of upside on lots ahead. They’ve sold quite a few lots on just word of mouth with no real promotion. There are houses going in. 

This is a very well planned and thought out project with great people in charge.

Sound interesting?

If I were asked to write a sales letter promoting this property to investors, I’m pretty sure I could make a strong argument with these details.

But would it be a good investment?

Here’s the thing: Every business sector has its own logic. And it’s an internal logic, not visible to outsiders. Until you’ve been in the business, you can’t know how it really works. And often, the most important circuits of that internal logic run differently than you’d expect.

In this case – developing a resort community in a foreign country – having a great piece of land is not nearly as valuable as you might think. In fact, it’s more often a liability than an asset.

When my partners and I got into the business more than 20 years ago, we bought a huge swath of land on a beautiful stretch of Pacific Ocean coast. The views, the surf, the opportunities were amazing. And we paid something like $500 an acre.

Today, those acres are selling for a minimum of $100,000 each. So we must be making a fortune, right?

That’s what we thought. It turns out that in this particular business there are three things that matter much more than the cost of land. One is the cost of infrastructure. Another is the cost of money. And the third is the cost of sales.

Infrastructure: Before I got into the business, I thought infrastructure costs  – electricity, running water, roads, sewage, etc. – would be the same, or even less, than they are in the states. But when the location has no running water, sewage services, or reliable electrical service, and when you have to build the roads yourself, the cost can be much more than you’d pay in the States.

Money: Development takes time. And time is money. It doesn’t matter whether you are using equity or debt, that money’s going to cost you. It’s going to eat up the profits. The longer the project takes to complete, the higher that cost of money. And it always takes longer than you think.

Marketing: Forget about the 3% to 6% sales commission you’re used to paying in the States. That won’t get your lots sold in an area that has no published listings and, more importantly, no local demand. What you need is a targeted marketing campaign to the 0.1% of Americans that are candidates for this kind of property. And the cost of that marketing is very high. If you are good, it will cost you 50% of the sale price.

So back to that $500 lot that sells for $100,000… The infrastructure costs – per lot – will be i $30,000 to $40,000. The cost of money, given the fact that the project will take at least twice the time you thought it would: another $10,000. And the marketing: as much as $50,000.

Yes, good money was made. But very little or none of it went to the investors.

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Just One Thing: Are You a Grower or a Tender?

Take This 10-Question Quiz and Find Out 

If you want your business to run smoothly, manage it well. Tend to the details. Think in terms of people, protocols, and production.

If you want your business to grow, forget about all that. Put someone in charge of it who is capable of creating growth.

Growers are rare birds. It’s quite possible that – other than you – your business doesn’t have a single grower in its employ.

Or maybe it has one or two, but they are not being given the liberty they need to do what only they can do. In that case, their superpowers are negated.

It’s also possible that you are not a grower – that once you were but now you are a tender.

Here’s a quick test to find out. Take it yourself, give it to someone else, or take it on behalf of someone you supervise.

Management Personality Test: 10 Questions Based on the Common Impulses and Characteristics of Growers 

  1. What do you care more about – quantity or quality? Would you rather have a bakery known for being the best in the city… or a factory selling more baked goods than anyone else in the state?
  2. What do you typically think about at work? How to solve problems… or how to boost sales?
  3. Do you welcome new marketing and sales ideas? Do you see them as exciting opportunities… or as extra work that will just screw thing up and slow things down?
  4. Would you describe your management personality as understanding or impatient?
  5. On a scale of 1 to 10, how competitive are you?
  6. Are you fair about the expectations you have of your fellow employees and subordinates? Do you demonstrate that fairness… or do you frequently indicate that you’d like things done faster?
  7. Do you care about other people’s workloads or problems? Or do you care only about getting your own agenda done ASAP?
  8. When someone suggests a new product, protocol, or plan to increase sales, do you endorse it immediately… even though you are not sure it will work?
  9. Do you understand the need for bureaucracy? Or do you have zero patience for it?
  10. With respect to your career, what’s more important: being admired for your character… or venerated for your success?
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Just One Thing: How to Get People to Like You 

I’m perverted in oh so many ways.

One perversity of mine is the habit of being disagreeable with the people I care about. If I don’t care about someone, I’m as agreeable as a sunny day in London. I will laugh at every joke, no matter how lame, and concur with every opinion, no matter how idiotic. But if I care about someone, there is nothing I like better than to challenge everything they say.

I’ve wondered why I do that. It could be that it’s a screening process – to cull out from potential friends the superficially attractive from the worthy contenders. Or it could be that I have such a low opinion of myself that I want to sabotage the relationships that hold the most promise.

And yet I want to be liked. And to be liked by everyone – even those I don’t like.

Here is a fact about human nature: We tend to like people that admire us. Why? Because it makes us feel validated. (“I must be okay in some way if this person believes I am.”) I’m sure an evolutionary biologist could tie that into a survival instinct – joining a tribe for self-protection, perhaps. In any case, it’s an indisputable fact.

And there’s a pragmatic benefit to being admired. People that like you are more apt to cooperate with you. This is why so many successful business people and politicians are able to build teams of people behind them.

There are established methods for getting people to like you. The most popular is probably the one advocated by Dale Carnegie and by Mystery (the reality TV pickup artist): Don’t talk about yourself. Pay attention to them. Listen to what they say. Affirm their feelings. Remember and use their names. Compliment them.

This may sound artificial or manipulative. But I learned long ago two things that I have kept in mind: (1) Even if you are faking your admiration, it is still appreciated. And (2) if you can pay attention to and compliment people earnestly, your likeability will be even greater.

I was reminded of this recently by Donald Miller, a business blogger that has a talent for communicating simple but important business ideas. In a recent essay, he told a story about a fishing trip he took with several of his buddies…

At dinner, one night, one of the guys suggested that they each stand up and accept a standing ovation from the others. Initially, Miller said, he recoiled at the idea. But he went along with it. And when he did, he discovered that he had no trouble participating. “I realized that there was something about each of these men that I genuinely admired,” he said. “I was happy to applaud them and happy to receive their applause.” (I’m paraphrasing.)

I began using this strategy in business about 20 years ago. As a mentor to copywriters, I had a reputation for being critical. I’ve been told that more than once my comments devastated people. I was shocked to hear that and determined to change my ways.

I wasn’t going to refrain from saying what needed to be said. But before I dared to say anything negative, I found something – some aspect of the person’s intelligence, work ethic, or talent – that I could praise. It didn’t have to be a big thing. But it had to be true. They had to know that I honestly admired them for this specific thing.

The result of putting this into practice was a noticeable improvement in the progress of the people I mentored. I believe it was caused by their willingness to accept my criticism because I had established a basis of trust.

The key to this technique is to zero in on something you truly admire about the person and be willing to state it repeatedly and, whenever possible, in front of others. If you fake it, it will (as I said above) still make them feel good. But they will see it as flattery and it won’t build the trust that you want and need.

Some people do this naturally. Number Three Son has been doing it since he was a toddler. When he meets people, he instinctively searches for something he likes about them and expresses it in terms of admiration. He doesn’t do it with any ulterior motive. He does it because he feels it. (It’s not surprising to me that he has such a diverse group of friends and colleagues.)

AS, a high-school friend of mine, is also a master of this technique. He is always telling friends and even strangers what he likes and admires about them. He does it to me all the time. It can be something as unimportant as a quirk or some little routine that he finds amusing. But the telling of it – when it’s genuine – has a powerful impact. And the result? He has dozens if not hundreds of people that like him and would be happy to help him out if he needed help. When it comes to goodwill, his account is overflowing.

Donald Miller’s essay reminds me that relationships are built on trust, and trust is built on belief. Think of every conversation you have as an opportunity to add some goodwill to your personal likeability account.

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Please… Don’t Follow My Advice!  

There are times when I want people to follow my advice, but not often. Most of the time I want people to listen to what I’m saying with an open mind, and then do whatever they think best.

True story…

When cryptocurrencies were at the height of their popularity several years ago, I had the following conversation with a brilliant young man that had worked with me in the investment advisory field:

DT: I’m thinking of going back to work. I could use some extra savings.

Me: “What? But surely you are rich now. Weren’t you an early buyer of Bitcoin? Didn’t you have a significant stake?”

DT: “Yes. But I sold it. I made a few hundred thousand. But I could have had millions.”

 Me: “What the hell happened?”

 DT (looking at me quizzically): “Huh? You don’t remember?”

 Me. “Remember what?”

 DT: “About a year after I bought it, I asked you what you thought about cryptos. You said you didn’t believe they would ever replace the dollar.”

 Me: “Yes. I still feel that way.”

 DT: “You said you thought their value would ebb. That they might even become worthless one day.”

 Me: “And?”

 DT: “And so I sold them.”

 Me: “You what?”

 DT: “I sold them.”

 Me: “Why did you do that?”

 DT: “What do you mean? You practically urged me to sell them?”

 Me: “I did no such thing. But even if I had, why would you make a decision based on my opinion? You are a market analyst. One of the best I ever worked with. I’m just a businessman with a bunch of ideas. I’m hardly an expert in cryptocurrencies.”

 DT: “Yeah, but you made a convincing case.”

 Me (shrugging): “That’s what a writer does. But sometimes I’m wrong. There’s a big difference between making a good case for something and being right about it.”

 DT: “Well, I wish you had said that before you gave me your advice on Bitcoin.”

As a writer, I write about lots of things. When I write about wealth building or personal productivity, my ideas are based on my experience – what I’ve done and what I’ve observed firsthand. When I write about investing, my ideas are based only partly on what I’ve done. They are also based on what I’ve read – the most convincing ideas that I’ve found from writers whose work I find credible.

As a consumer of writing, I make decisions based on what I’ve learned from experience and also on the credible advice I’ve read. But I never make decisions based on a single argument – especially when those decisions are big and important.

So here’s my advice on taking my advice:

If you work for a business I own and I give you advice, I expect you to listen to me as if your job depended on it. Because it does. You can choose to do something other than that which I recommend – but if you do so, I expect you’ll let me know in advance and give me a fair explanation.

Otherwise, I expect my advice to be treated like… well, like advice: one person’s idea of what to do in one particular situation. I definitely don’t expect it to be the final word.

I know people that get angry when the advice they give is not heeded. “Why do I bother?” they say. “You don’t listen to me!”

That’s not the way I feel. As I said in the beginning, yes, I want you to listen to my advice. But I want you to then compare it to other advice and (most importantly) to your own gut feeling that comes from your experience. And then make up your own mind.

If  I thought that everyone that listened to me would always do exactly what I recommend, slavishly, I’d give no advice at all!

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Principles of Wealth #33* 

The entrepreneur’s five most important jobs are: (1) locating viable markets, (2) creating desirable products for those markets, (3) designing successful sales campaigns, (4) converting new buyers to multiple buyers, and (5) managing profits.

I once wrote a book called Ready, Fire, Aim: Zero to $100 Million in No Time Flat. It has had more success – not just in terms of copies sold but in the more important consideration of lives changed – than any of the other dozen-plus books I’ve written about business.

The purpose of Ready, Fire, Aim, was to set down the lessons I had learned about entrepreneurial businesses. The premise was that most of what was being written about entrepreneurship at the time was remarkably different from my experience.

But it wasn’t just that the advice was different that bothered me. Some of it seemed downright wrong. In many cases, these writers were advocating business practices I had tried myself and seen fail. And not just once, but repeatedly.

I’m talking, for example, about ideas on how to start a new business. Advice about researching the market, creating a business plan, forming a corporate structure, devising a corporate mission, etc.

What had worked for me was to focus 80% of my time and energy on the following:

Locating viable markets

What the business books were advising was to research the market you want to be in. If you want to sell hairbrushes, research the hairbrush industry. Study the demographics and psychographics of the market. Identify a need.

What we (my partners and I) did was slightly but critically different. We didn’t decide on the product first. We chose the market first. We would start with a market sector we felt we knew something about – say, selling information. Then we looked at various information markets to find those that were rapidly expanding. The thought behind this was both practical and humble. Rising tides raise all ships. We were practical enough not to care terribly about what part of the market we wanted to play in. And we were humble enough to know that as beginners we were starting with very small boats.

Once we located a fast-growing market, we studied it. But again, we didn’t rely on abstruse market analysis to figure out what sort of products to offer. We simply identified a half-dozen of the most successful companies in the market and looked at their bestselling products.

We then asked ourselves, “Can any of these products be improved on in some way?”

Creating desirable products 

The products we created were not revolutionary. Rather, they were variations of other products that were already in the market, products that were selling well. In other words, products for which there was a proven demand.

We didn’t replicate these products because we knew that would not work. Instead, we made them more efficient or easier to use or more attractive or cheaper.

We were not rocket scientists or social engineers trying to change the world. We were hardworking tinkers and testers and traders.

Designing successful sales campaigns 

We used the same commonsense approach to design our sales campaigns.

If the bestselling products were being sold mostly via newspaper ads, we’d use newspaper ads. If they were half-page formats, we used half-page formats. If they were priced in the $30 to $50 range, we priced ours in that range – preferably at or below $30.

And we always made it a point to demonstrate how ours were better (or cheaper) than the competition.

Converting new buyers to multiple buyers 

This was something we learned gradually, but it proved to be critical to generating the cash needed to make a start-up operation grow.

New buyers, we discovered, were generally enthusiastic buyers. Rather than waiting a while to sell them a second or third product, we found that the sooner we could pitch them after their first purchase, the more likely they were to buy.

Just as importantly, we discovered that when you have a group of, say, 100 new buyers that have just paid $50 for a product, 10% to 30% of them will be happy to pay $100 or more for an upgraded version of the same thing.

Managing profits 

Giving priority to those four tasks was the key to all our successful startups. It allowed us to create positive cash flow and build a critical mass of customers before our time, money, and patience ran out.

But that wasn’t enough to take the business through the $1 million revenue barrier… and then the $10 million barrier… and finally the $100 million barrier. To accomplish that, we had to learn how to manage our profits.

Profits are the lifeblood of real entrepreneurial businesses. Managing profits is about being very careful about how you spend them – how much you reinvest in marketing and new product development and employees and all the other costs of growing a business.

The advice I give to would-be entrepreneurs today is largely based on these five priorities. It’s fine to read about the business geniuses that take great risks and end up as billionaires. But if you want to increase your odds above 1-in-1000, I’d consider those stories fiction. For a reliable manual about what works the other 999 times, check out Ready, Fire, Aim.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost. 

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Just One Thing: How to Negotiate in One Lesson 

JSN, my ex-boss/then partner, was, in most ways, a great negotiator. He was aggressive, highly intelligent, and charming. That very rare combination of assets allowed him to get pretty much whatever he wanted out of every deal.

BB, my client/partner, is not considered to be a great – or even good – negotiator. He doesn’t claim to be. He doesn’t like negotiating, but he occasionally does negotiate. And when he does, he proves himself to be equally as charming and intelligent as JSN. But he is not aggressive. In fact, a typical “negotiation” with him might sound something like this:

Him: What do you think it’s worth?

You: Thirty percent.

Him. That seems reasonable.

Or…

Him: What do you think it’s worth?

You: Sixty percent.

Him. Oh, I couldn’t afford that.

And that’s it. Done. In the first case, you have a deal. In the second case, you don’t. And don’t try to come back by lowering the “ask.” He isn’t interested.

I sat beside JSN at the negotiating table for 11 years, and beside BB twice that long. I can say that JSN deserved his reputation as a master negotiator – but in the realm BB operates in, he is actually better.

The difference depends on understanding that in business there are two fundamentally different kinds of negotiation: transactional and relational.

JSN looked at almost every deal he made as a transaction. He had something of value to buy or something to sell, and the goal of the negotiation was to somehow come out on top.

BB eschews transactional deals. If they must be done, he appoints someone else to do them. But he does negotiate relational deals. He looks at them as… how shall I put it? As first dates. A negotiation for BB is an opportunity to discover if he and the other person could be good business partners.

In other words, JSN viewed business as a series of individual transactions. Success to him depended on being the winner in as many of these transactions as possible.

BB views business as a complex series of relationships. Success to him is hooking up with the right sort of people.

I learned lots of tricks from JSN that I employ when I am negotiating a one-time transaction, such as buying a car or a painting or a house. But in business, I prefer BB’s approach.

When I negotiate BB’s way, I have a chance to find out if I am compatible with the person on the other side of the table – i.e., if their idea of fairness is the same as mine.

A fair deal in relational negotiation is one that works well for both sides, and not just immediately but also in the future. That means I can’t go into the negotiation with a fixed, pre-determined outcome in mind. I have to be prepared to accept a deal that works not only for me but also for the other person.

There have been many times when the other person was willing to accept a deal that favored me. When that happened, I insisted that we structure a deal that was better for them. Not out of altruism, but because I realized that what matters most is not the immediate transaction but the long-term relationship.

When you are negotiating relationships, you have to think this way. If you don’t, one of two things will happen: The deal will not be made because the other person will feel you are bullying them… or they will accept the deal but later on feel that they were cheated.

In either case, the opportunity to forge a potentially profitable relationship for years to come will have been lost.

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Just One Thing: Mission Statements

You don’t need a mission statement to build your business. I’ve helped build dozens of successful multimillion-dollar businesses without one. The largest company I helped build, which grew from $8 million to $1.6 billion, never had a mission statement.

So you don’t need a mission statement. But you do need a mission. In fact, you need two – two missions based on the two things that every business must do to survive and prosper:

  1. It must offer a product or service that its customers are willing to buy.
  2. It must be profitable.

If you can’t distinguish your product or service in some way from the competition, people won’t buy it. And if you can’t sell your products and services profitably, you’ll soon run out of money and have to close the business.

Which is why every business must have two basic goals: to create value (or the perception of value) for the customer, and to sell it profitably.

These are the universal missions. They must be pursued relentlessly. There can be no other objectives with greater importance.

The founder/CEO must devote 80% of his time to them. So must all of the key managers.

You can write them down if you want to, but you don’t have to. You do, however, have to make them top priorities by caring greatly about them and by expecting everyone that works for you to do the same.

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Principles of Wealth #32* 

Most people fear entrepreneurship because they believe it takes genius, courage, and luck. In fact, these factors are rare contributors to success in start-up business ventures. The factors that matter most are common sense. humility, cautiousness, a relentless work ethic, and perseverance. 

Have you read a story like this recently?

A bright young college kid has an idea about a revolutionary new way of doing something. He mentions the idea to a few people that he respects. They tell him he’s crazy. It’s a bad idea. It won’t work.

He won’t be dissuaded. He drops out of college, recruits a few friends, and spends a year and all his money creating his better mousetrap. When it’s ready to go to market, he’s got no money left, so he borrows from his family.

The pressure is on. If it doesn’t work, he’s lost time, all his money, his family’s money, and his self-esteem. But lo and behold, the market is thrilled by his new product. Investor money pours in. His company grows. A few years later, he’s a billionaire and lauded as a genius.

That’s the entrepreneurial story dreams are made of. The reality for 99% of entrepreneurs is quite different.

It begins not with a big, world-changing idea but with a modest notion of how some business he knows (usually as an employee) could be better in some way. He works on his idea evenings and on weekends, testing it in bits and pieces with whatever money he’s been able to save. And then, several years later, when his idea is no longer just an idea but a proven concept, he launches his business.

He doesn’t quit his job. He runs his new business as a sideline. It grows in fits and starts. Three or four years later, sales reach the million-dollar mark and he quits his job and runs his new business full-time.

Some years later, revenues reach $10 million and his net worth exceeds a million dollars.

* Fact: 80% of entrepreneurial millionaires start their businesses from scratch, using their own savings.

* Fact: The average time it takes for a successful business to reach $1 million in sales is 7 years.

As in many other areas of life, the truth about entrepreneurship is less exciting than the stories we read in magazines and bestselling books. That’s not because risk-everything/ win-huge doesn’t happen. It does. But it happens very rarely. One out of a thousand startups has the sort of success that makes for a good movie. The rest are mundane.

There are two reasons we keep hearing these exciting stories.

The first and most important reason is the very fact that they are exciting. Who wants to write a book or make a movie about a guy that uses common sense and grit to grind his way to merely millionaire status?

The second is that when founders of super-successful businesses are interviewed, they prefer to talk about the fun and the thrilling moments they remember. Why bore the writer with accounts of the daily grind?

Also, because they don’t want to look like braggarts, when asked about the success of their business they will usually attribute it to luck – the luck of having great people as employees and the luck of good timing.

And there’s some truth to that. When you look back on an extremely successful career, it often does feel like luck. But when you are starting out and looking forward, you aren’t looking at a crystal ball. You are looking at 16-hour working days, six or seven days a week.

But all this is actually good news for anyone wishing to start a business. The facts tell us that luck and genius are not necessary prerequisites.

What you do need are:

* Enough common sense to come up with or recognize a sensible idea

* The humility to modify your idea if facts prove it wrong

* Cautiousness about spending your money so it doesn’t run out

* A relentless work ethic

* And enormous perseverance

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost.

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