Principles of Wealth #29* 

There are proven ways to safely achieve a higher-than-average ROI for certain asset classes under certain conditions. One can, for example, safely double the ROIs on income-producing real estate by using bank financing wisely. The same is true for many business transactions, some stock strategies, and a handful of other asset classes. 

There is a perfectly understandable reason why investors care so much about ROI (the rate of return they get on their invested money). Consider the difference between making 10% versus 20% on a grubstake of $20,000 over 40 years. At 10%, you would end up with $905,000. At 20%, you’d have $29 million!

Here’s the problem: It’s basically impossible to get a 20% ROI over 40 years. When individual investors try to get those sorts of returns, their actual average ROIs are less than 3%.

So the real difference isn’t between $905,000 and $29 million. It’s between $905,000 and $65,000.

Nine hundred grand is not a fortune, but it’s a heck of a lot better than $65,000.

Sixty-five grand will get you just about nothing. Nine hundred grand will give you a theoretical return of about $90,000 a year. Most financial planners agree that taking out 4% every year is safe. Four percent of $905,000 is $36,000. That’s how much you could take out without depleting the base.

This brings us to a related principle…

Although it’s foolish to try to double the natural (historical) ROI for any market, there are reasonable ways to achieve modestly higher gains safely. 

 There are ways in almost every market to outpace the averages by, say, 20% safely. For example, if the average ROI is 10% (as allowed for above), it is sometimes perfectly reasonable to shoot for 12%.

The difference between 10% and 12% may sound like very little. The math may surprise you.

That same $20,000 invested over 40 years at 12% will effectively double the end result, taking the retirement nest egg from $905,000 to more than $1.8 million. Four percent of $1.8 million gives you $72,000 a year. A big difference!

To recap:

If you try to turn that $20,000 into $29 million, you will likely end up with $65,000. Which will be worth, after inflation, no more than you started out with.

If you are happy to get a historical market return of 10%, you’ll end up with $905,000 in your retirement account, from which you can take $36,000 a year.

If you tweak your investment strategy to get just 20% more than the average – in this case, 12% – you will end up with a retirement nest egg of $1.8 million and the ability to withdraw $72,000 a year safely.

* 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. 

In 2007, Warren Buffett made a 10-year, million-dollar bet with Ted Seides, a very successful hedge-fund manager. Seides had claimed that, in that time, hedge funds would outperform the markets. So Buffett challenged him to beat an S&P 500 index fund with a portfolio of five hand-picked (by Seides) hedge funds. The winner would donate the proceeds to a charity.

Ten years later, Girls Inc., Buffett’s charity, received the prize. The compounded annual return of Seides’s five funds averaged 2.2%, while the S&P 500 returned 7.1%.

What does that tell us?

I’ll get to that in a moment. Right now, let’s look some facts about the market that might surprise you.

10 Possibly Surprising Facts About Stock Investing… and

What Warren Buffett Says You Should Do About Them 

1. Historically, the Dow has been positive 52% of the total trading days and negative 48%. The average daily return is 0.73% when it’s up and -0.76% when it’s down.
2. There is no significant difference between the Dow and the S&P 500. The rolling one-year correlation since 1970 is 0.95.
3. The S&P 500 is very unstable. In the 41 years from 1957 to 1998, only 74 of the original 500 companies were still in the index.
4. Between 1980 and 2018, there were 36 corrections. (A stock market correction is a downturn of 10% or more.) That’s 36 corrections in 30 years.
5. If there were 36 corrections between 1980 and 2018, there were also 36 recoveries. The stock market can recover from a correction in a pretty short period of time. But some individual stocks don’t. According to research by J.P. Morgan, of all the companies in the Russell 3000 index since 1980, about 40% of the stocks suffered a permanent 70% or more decline from their peak value.
6. A similar fact: Since 1980, more than 320 companies were removed from the S&P 500 for business distress reasons.
7. In 1980, gold traded at around $800 per ounce and the Dow was around 800 points. Gold has since gone up 62.5% (to about $1300 per ounce), while the Dow has gone up 3150% (to about 26,000).
8. If you had invested from 1960 to1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980 to 2000 and underperformed the market by 5% a year.
9. Mutual funds do not outperform the market over the long term, according to every study ever done on the subject. And those that perform well over a short term do so because of luck, not skill, according to a recent study.
10. Fortunemagazine published an article titled “10 Stocks to Last the Decade” in August 2000. By December 2012, the portfolio had lost 74.3% of its value.

 And here’s a bonus fact:Warren Buffett is generally considered the greatest investor of all time. In the 20 months leading up to the dot-com peak, Berkshire Hathaway lost 45% of its value. The NASDAQ 100 gained 225% over the same time.

So what does all this tell us? It tells me that…

* The stock market is not a single thing. It is a name we give to thousands of economic and business interactions and billions of individual decisions. It is not rational and it cannot be predicted.

* Only a small percentage of the brightest and most experienced fund managers can beat the market over the long term. And those few that have done so probably accomplished it by luck, not skill.

* The long-term trend of the stock market is positive, yielding between 8% and 11% annually, depending on how you do your calculations. It seems reasonable, therefore, to invest in the stock market for the long term.

* Although the stock market as a whole has performed well historically, many of its biggest and best companies have fallen by the wayside. Diversification is the only sane way to invest for the long term.

* Long term really means “not now but maybe later.” To get the 8% to 11% the market has delivered historically, you have to be able to wait 5 or 10 years to cash in. If you think you can beat the market, you are almost certainly delusional. If you try, chances are you will end up with much less than half of what you’d make if you are willing to accept that 8% to 11%.

* You can get very rich over the long term with an ROI of 8% to 11%,

Bottom Line:The best way to lock in average returns is to follow Warren Buffett’s advice: Invest in a low-cost index fund or in a portfolio of individual stocks that acts like an index fund.

Myths and Facts About the Gender Pay Gap 

I don’t think I know a single woman that is not concerned about the reported gender pay gap in the USA. Moreover, I know several women in my business that believe it’s a personal problem for them.

That’s understandable, given the data reported ad nauseum in the mainstream press. According to the oft-quoted statistics, for example:

* Latina women get 53% of what men get.

* Black women get 61%.

* White women get 77%.

* Asian women get 85%.

The same data, by the way, identify pay gaps between racial groups. On average:

* Asian women earn 81 cents for every dollar earned by Asian men.

* Black women earn 82 cents for every dollar earned by black men.

* Hispanic women earn 88 cents for every dollar earned by Hispanic men.

* White, non-Hispanic women earn 75 cents for every dollar earned by white, non-Hispanic men.

White, non-Hispanic women, on average, lose $10,000 to the pay gap annually. Over a 40-year career, that translates to a loss of more than $400,000. And for women of color, the loss is even greater: nearly $900,000 for African-American women; more than $1 million for Latinas.

Needless to say, 30 or 40 years of earning less every year means that women will be able to save less than men. Sure enough, studies show that, on average, women end up with half the wealth men have in retirement accounts.

So the gender wage gap is something to be concerned about.

Or is it?

The problem with the above numbers is that they are gross averages based on a single variable: gender. You don’t have to be a statistician to understand that outcomes that result from multiple variables must be measured scientifically – i.e., by isolating all variables but the one measured. This is not what is being done to arrive at those alarming, and popularly quoted, numbers.

If, for example, you used the same unscientific approach in looking at race, you’d find a wage gap that is even larger than that for gender. White women, for example, out-earn black men, and by a considerable margin. And second-generation Jewish and Asian women earn more than white men.

In other words, it’s entirely unhelpful (and, in fact, misleading) to compare the average salaries of all women as measured against the average salaries of all men.

So what are the other variables? What other factors does one need to isolate to determine wage gaps?

The most obvious is education. College educated people earn, on average, considerably more than people with high school degrees. This is true for men and women, black and white, Asian and Hispanic, etc.

Another important variable is choice of profession. And when you look at the choices men make as compared to women, there is an obvious difference. In four of the five highest-paying college majors, men outnumber women by a considerable degree (between 60% and 80%). And in four of the five lowest-paying college majors (education, the arts, and social work), women greatly outnumber men.

You also have to look at the different choices made by men and women within the same profession.

Male nurses, for example, make, on average, 18% more than female nurses. The reason? Male nurses choose higher-paying specialties, work longer hours, and are willing to relocate to better-paying parts of the country. And according to Harvard economist Claudia Golden, even with lawyers that have the same education, specialty, and work the same hours, firms will quite reasonably pay more to those that are on call 24/7 and are willing to travel or relocate. It’s not surprising to learn that most (but not all) of those lawyers are men.

Similar differences between men and women account for much of the wage gap that exists in most professions. When these sorts of variables are isolated (as has been done in several large studies), the wage gap shrinks to about 3%.

And even that 3% gap can be partially explained. I’m talking about the fact that men are statistically more likely to negotiate their compensation than women and, perhaps more importantly, are more confident in negotiating their salaries.

This is no small thing. When you consider how difficult it is for a business to make a profit, it is easy to understand that management is always trying to keep raises and bonuses down. So if you don’t make an effort to push against this tendency, chances are you will end up getting less. You’ve got to be willing to squeak, as it were, to get the oil.

I’ve seen this play out more than a dozen times in my career. And more than a few times, I’ve interceded on behalf of those that did not squeak (mostly women). I didn’t do it out of a commitment to break the wage gap. I did it because I believe that, in the long run, it makes no sense to pay anyone less than he or she is worth.

Since I’m explaining my thinking here, I have to confess that I have, over the years, developed gender preferences with respect to some jobs and responsibilities. I have come to believe, for example, that women are generally better than men at work that involves noticing and tracking details. And that men are usually more willing to volunteer for leadership roles, even when they are not qualified.

It’s possible that these prejudices cloud my judgment in terms of choosing people to do specific jobs. But I’d prefer to believe that my assessments are based not on sex or ethnic/cultural identity but on performance and capability. I say that because my interest in business is based on building long-term profits. And so I favor whichever individual is better equipped to help the business attain that goal.

In fact, the only time I can remember favoring people in making compensation divisions has been to err on the side of women and minorities. I do have a social instinct, and it is one that favors affirmative action.

But maybe I’m deluding myself. Maybe despite my beliefs about what I’m doing, unconscious sexism and racism is working its way into my assessments in favoring white men.

It would be bad business if that were true, but maybe I am.

Let’s assume, then, that this sort of “institutional sexism and racism” is playing a role. The net effect of it, when you do measure the gaps scientifically, is less than 3%.

Three percent is still a gap. So what to do?

My advice to anyone that believes she (or he) is a victim of such biases should first of all figure out where and how the better money is being made. If you are an accountant, you might want to consider becoming the CFO. Or, better yet, move over to the sales or marketing side of the business, where the bigger compensations are.

Next, do everything in your power to outperform your colleagues. Get a mentor. Schmooze. And when it comes time to talk about your compensation, go into the meeting with both guns blasting.

Of course, this is the advice I would give to anyone who wants to make more money. It works for men. It should work for women, too. And if it doesn’t? Find a better job.

Are you a senior executive? Do you employ one? If so, watch out. You/he may be dangerous to your company’s bottom line.

The problem is Senior Executive Syndrome (SES): the tendency for a senior executive – someone who has climbed to the top of his business or department – to kick back and goof off.

It happens all the time, but we don’t talk about it. Why? For one of two reasons: Either (a) we work for the lazy bastard or (b) we are the lazy bastard.

I’ve seen it happen to dozens of very good people and in just about every company I’ve owned or worked for. It usually doesn’t happen in the beginning, when everybody is busy and the business is growing. But when things get fat, watch out!

It can happen to anyone. Your boss. His boss. The boss of the business you count on. The boss you are trying to strike a deal with. The perfectly suited senior executive you just hired to run one of your divisions. Your best and most loyal crew leader.

And, yes, it can happen to you too.

“Senior Executive Syndrome”: The Anatomy of a Business Disease 

A bright, ambitious person comes into a business and does everything right from day one. Comes in early and leaves late. Emails you on Sunday. Has great ideas. Builds a clutch team. He becomes THE guy.

And so he’s promoted. And he keeps on performing over the years until he gets into a position in which, finally, there is no one looking over his shoulder. He is responsible for the company’s bottom line.

It is expected that he will continue to work as hard and as smart as ever. And for a while, he does just that. Executing new ideas. Streamlining expenses. Improving the executive staff. Business is good, and everybody is happy.

But something happens. Somewhere along the line, he burns out a little. He tries not to show it, because he wants the troops to keep trooping. But inside, he’s tired of the grind and dreaming of a less stressful life.

Several years may go by like this, during which time he refines his key-management team and fine-tunes operating procedures. Then one day he decides (all by himself and without speaking to anyone) that the business can run fine – at least for a while – without so much involvement on his part.

But rather than make that clear so that the proper adjustments can be made, he simply starts to do less. He gets into the office later. He takes long lunch hours. And he may spend an inordinate amount of time traveling to industry seminars.

Meanwhile, the business IS doing fine. But because nobody knows he is doing less, some of the most important stuff he used to do may no longer be getting done.

Let’s take a look at that. To rise to the top of a growing, profitable business, you usually need three things:

1. A hardcore commitment to growth.

There are basically two kinds of leaders: tenders and growers. Tenders solve problems, clarify goals, and improve communications. Growers create problems because their primary interest is in growing the business – the number of products, the number of employees, and, most importantly the bottom line.

2. A hardcore commitment to quality.

Once the business is up and growing and the cash flow is strong enough to continue that growth, the CEO (and other senior executives) must put on their tender hats and begin to solve the problems that have arisen and will arise from future growth. Tending to these problems and challenges is not easy. It takes the same level of commitment that growing does.

3. The willingness to find leaders that can replace you.

This is just as important as a commitment to growth and to quality. If you are not willing to find people to take over all the key parts of the business as it grows, there will come a point where the business will stop growing and you won’t know why. Unless you look in the mirror.

So here’s the problem – how SES comes into play.

If you do a good job at growing, tending, and finding superstars to continue the growing and tending, you will end up with a large business that seems to be running itself.

And as a founder and/or CEO, you may be okay with that.

But if you sit back and allow your superstars to grow and manage your business for you, there will come a time when they themselves will be in a position to follow your lead and kick back.

And if they do, others will follow. The business may do well for a while. But eventually, the growth will slow and so will the profits. Growth will slow because your growers will no longer feel the urgency to grow the business. And profits will diminish because you will be paying big salaries to former growers that are on cruise control.

So how do you solve this problem?

It’s actually easier than you might think. If and when you decide to let up on yourself, don’t allow the senior executives that report to you to feel any less pressure.

You don’t need to have daily meetings and thumb through dozens of weekly and monthly reports. Just make sure that when you meet with your senior staff you come to those meetings with high expectations. Ask questions. Be critical of the answers you get. But most importantly, don’t take on any responsibility during the meetings.

Think of any problems and challenges the business faces as playful monkeys. When you go to an important executive meeting there are problems and challenges you must face. Your job is to listen to the problems and make comments. It’s not your job to solve those problems. So make a mental note to “make sure all the monkeys are on everyone else’s back.”

You probably won’t have to do any more than that because you will be talking to people that made it to where they are by having a strong work ethic, a good deal of personal pride, and a desire to excel. These are your superstars. Your power plant people. They don’t need to be rebuilt from scratch. They just need a spark to get the fire burning again.

One final thought: If your boss has SES, you’re in luck. This is your big opportunity to take over. Volunteer to do what it is clear he doesn’t want to do. Convince him that you can do a great job of it. Promise him the world. And ask him for a cut of the action. If he’s got a really bad case of SES, he’ll be very tempted by your offer.

How to Give a Good Speech Even If You Hate Speaking 

I hate giving speeches. Most people do. One study suggested that speaking in front of an audience was number two on the list of what people fear most – just behind death.

I hate giving speeches so my usual response, when invited to give one, is to say no thanks. “I’ll sit on a chair and answer questions,” I say, “but I don’t want to get up there and make an actual speech.”

Three or four times a year, I do make a speech. And my usual strategy to prepare for it is to do nothing. I put the speech on my schedule and then forget about it. I begin to think about what I’m going to say just a few hours before I’m going to give it. I find that this drastically reduces the amount of stress I feel in the days leading up to the speech. But, of course, my stress on the day of the speech is pretty intense.

Given that, you might be wondering why I’m about to give you advice on how to give a good speech. The answer is that even though I don’t like to give speeches, I have given dozens of them. And though I don’t like to prepare for them, I have, on occasion, forced myself to do it. And I can tell you this: Preparation works.

The first speech I prepared for was several years ago. It was a toast for Number Two Son’s wedding. I’d met the father-in-law the previous evening. He let me know that, as a father of the bride, he’d be speaking first. In typically demented fashion, I took that as a challenge.

“What are you doing?” K asked me that night.

“I’m working on my toast,” I told her.

“I’ve never seen you prepare a speech,” she said.

“I know,” I replied.

I gave a damn good toast that day – a better speech than I usually got (and still get) with my “do nothing” strategy. And since then, I have picked up a few shortcuts that have helped me turn would-be bad speeches into pretty good ones.

Here they are…

* “Pearls before swine.” Talk about what you really know. Don’t even try to speak about a subject you don’t truly understand. It’s a fool’s game. Make your speech about something – anything – that you know deeply from having lived it. If you do this, you won’t have to worry about seeming to be smart because you will be smart. If they don’t get it, you can tell yourself (as I do): “Pearls before swine!”

* Follow my Rule of One. The rule is simple: one idea, one story, one takeaway, and one benefit.

* The idea should be something you know to be true. Find a way to articulate it in a single, memorable sentence.

* Don’t begin with that sentence. Begin with a story. That story should illustrate your idea. It should begin with a goal and an obstacle to the goal and end with the overcoming of that obstacle.

* After you’ve told the story –  and only afterward – tell them the takeaway: the one simple and memorable statement that expresses your one big idea.

* After you’ve done that, tell them one big way that they will benefit from embracing that idea.

* Don’t memorize your speech, but do memorize the first and the last sentences.

Try this the next time you have to make a speech – either a formal one in front of hundreds of people, a presentation to your colleagues, or a pitch to your family at dinner. The preparation will be a lot easier than you are probably thinking it will be. And the result – you’ll see – will be well worth it.

You are googling your favorite celebrity online and ads keep popping up for Paris hotels. It just so happens that you are going to Paris for a business meeting next month. You did no searches for “Paris hotels.” How did they know?

A friend forwards me an email titled “Your Voter Report Card.” It chides him because he “failed to vote in the last three elections.” It was sent by a political organization he never joined or even heard of. “They have access to my voting records,” he said. “What else do they know about me?”

“In Dubai, you are never stopped for traffic violations,” our guide tells us. “They have digital cameras everywhere with super-sophisticated lenses that can not only track every car on the road by license plate, but also see into the car and identify who’s driving.”

And get this… Amazon has plans for “the next generation of the convenience store.” Says Jeff Brown, writing in The Palm Beach Daily News: “When you walk inside, you scan a barcode on your phone’s Amazon Go app linked to your Amazon account. That’s how the cameras know who you are. From there, you’re free to browse and take any items you wish. The cameras track which items you take. Then, you can simply leave with your items. Amazon will charge your credit card on file and email you a receipt. That’s it. No lines. No checkout counters. No self-scanning. You just walk in, grab what you want, and walk out… How’s that for convenient?”

The End of Privacy: Are You Ready for It? 

There is no doubt about it. Personal privacy is quickly becoming a thing of the past. Right now, if you would like to keep everything you do and say private, you’d have to live off the grid-like a 17^thcentury trapper. And with the amazing advancements in satellite and facial recognition technology, even that will soon be impossible. There are already cities where every movement on every street is recorded 24/7. In another 5 or 10 years, there won’t be a moment of our lives that is not observed and recorded.

What can you do to stop the continued erosion of personal privacy?

My answer: Nothing. It’s not going to end. There are simply too many consumer benefits to all the technologies – and too much money being made.

This is not a partisan trend. Ideologically speaking, it is an equal opportunity virus. It has come and is still coming from all sides of the political and social spectrums.

And that’s another reason there is no hope for an ebbing of the tide. Silicon Valley is not going to go Luddite. And our governments? They have to love it. For them, it means not only an end to crime but (more importantly) an end to tax evasion.

In the short term, there will be lots of public careers damaged and millions of private lives shattered. But in the long term – well, I believe we will all come to accept it. More than that, I think there’s a fair chance we might come to like it.

Imagine a world without rape and murder. Imagine a world where you can drive your car without worrying about reckless drivers or your children being kidnapped or bullied. Imagine a world where you don’t have to fret about anyone stealing from you or your spouse committing adultery. Imagine a world where you don’t have to do any sort of manual labor you don’t want to do. Imagine a world where nobody litters or shoplifts or uses foul language or cuts lines.

It may seem fantastical, but much of the technology is already here and the rest is being developed quickly.

It seems that privacy, like freedom or democracy, is or should be an inalienable right. But the fact is that privacy, like freedom and democracy, is valuable only if people value it. And it turns out that there are things that people value more. Comfort and ease are two. Security is another.

What’s happening – it seems to me (although perhaps I’m wrong because I don’t see anyone else saying this) – is that technology has been, for at least 30 years, changing the world in a way that is changing the ideas that people value.

If you are under 30, you already know this. If you are my age, you are worried. You are worrying about exposure. You know what I’m talking about – those little aberrant behaviors you’ve been indulging in privately. You’re not harming anyone, but you certainly don’t want them to be broadcast to the public!

Well, you are going to have to get over that. Because before long they will become public knowledge. We will be living in a world where everyone’s shameful behavior will be public. But guess what? Then it will no longer be shameful!

Nobody will care about those quirky little things you do in private because we will soon discover that everyone is doing quirky little things. We will soon discover something that poets and children have always known – that human behavior is much more varied and much less noble than we’ve been led to believe. We will discover that most people do all sorts of embarrassing things. And because those things will be understood as so common, there will no longer be any shame attached to them – and, thus, no reason to hide.

Imagine our brave new world as a global nudist camp. At first, you will want to keep your “private parts” covered up. But after seeing everyone else’s, you’ll be very comfortable exposing your own.

Does this sound implausible? Well, I’ll bet you anything that this is exactly what’s going to happen.

George is stuck between a rock and a hard place. About a year ago, he came out of retirement to work as a consultant for a large hotel complex in my town. He was brought in to rescue the project after the city had rejected the plans a half-dozen times. The developer thought, correctly, that George’s connections with the city would help get things moving again. After getting into the details, George realized the problem wasn’t with the city. The plans were full of mistakes.

He worked like crazy for months, reviewing and revising the plans and generating clever solutions where resolutions didn’t seem possible. He rescued the project, and so he should be on easy street now. But the project manager never gave George credit for all his good work. Worse, he took credit for it himself, and implied to the developer that George had been all but useless. That pisses George off.

George’s wife tells him, “Stop trying to be a hero. Just do the work, take the money, and forget about that jerk.”

On the surface, that sounds like good advice. But it’s not. As a consultant, George’s value to the business is demonstrated by all the problems he’s solved, the time he’s saved, and the reduction in spending he’s achieved. (Several million dollars and counting.)

If the developer doesn’t understand this – if he really believes the project manager solved those problems – there’s a good chance he won’t ask George to consult on his next job. That will be bad for George. But it will also be bad for the developer because he’ll be wasting money on mistakes that George could have prevented.

Watch Out for Jerks That Are Good at Managing Up 

George is frustrated. “The man has no idea what he’s doing,” he told me. “He gives bad directions. And when things go wrong because of those bad directions, he blames someone else. He has absolutely no management skills.”

“Actually,” I said, “there is one management skill that he’s very good at. Managing up.”

“What do you mean?”

“He’s terrible at managing down… managing the people below him, the people that are doing the work,” I said. “But from what you’ve said, it sounds like he’s great at managing up, managing the expectations and satisfaction of his boss.”

You might wonder how the project manager’s boss could know so little about George’s contributions. He’s the person on top. He’s paying for everything. Heck, he hired George! How could he believe the BS that his project manager is feeding him?

I have an insight because I’ve been in his position many times in my business career. And there were times when I was blind to what went on beneath me – when I let a supervisor, manager, or CEO deceive me about what was going on in the organization.

This always happened when there were two situations in place:

* I didn’t have enough time to pay serious attention to the business.

* I had someone running the business that I trusted completely.

Because I had so little time, I was more than happy to get all my input from the person that I trusted completely. We would meet once or twice a month for 30 to 60 minutes. I’d look over reports designed specifically for me. I’d ask a few questions. I’d get a few encouraging answers. And then we’d make an appointment to meet up again.

When those businesses went into decline, I never changed my approach. I asked questions and got answers. The problems were always caused by external factors. Not only did the managers present themselves as blameless, they let me know that the only chance of recovering was to continue to support them.

I can think of three perfectly good multimillion-dollar businesses that I had to close because I failed to recognize what was going on: I was being managed.

Here’s something you should know: Upward managers don’t care about the health or long-term profitability of your business. What they care about is that it does well enough to pay the bills and take care of their personal financial aspirations. So when things start to go bad, they don’t feel the need to sound the alarm. They will do what they can to bandage the wounds. But if the patient looks terminal, they’ll quietly start shopping for another job while they continue to tell you that the patient is just about to turn the corner.

And here’s another thing you should know: The upward managers I worked with were very smart, very good at manufacturing specious information, and very adept at manipulating my emotions.

Looking back, I can see three reasons I let this happen.

1. Hubris. I prided myself on believing that I was too smart to be fooled by “facts” or manipulated by flattery and false projections.
2. Laziness. Because I was busy with so many other things, I was unwilling to spend just a few more hours per week looking deeper into the numbers and having conversations with other employees.
3. Fear of failure. Beneath everything – the pride and the laziness – I think I had a fear of failure. On the surface of my mind, I was accepting the BS I was being handed. But deep down, I always knew that there were problems, even before the businesses went into decline, I knew it. But I did nothing about it and continued to rely on the upward managers because I was afraid I could not solve those problems.

I don’t know the developer that hired George so I can’t know for certain why he’s allowing his project manager to be his sole source of information. But given the fact that he hired George, I can think of only one reason he wouldn’t want to hear from George: He’s fallen into the trap I fell into. He doesn’t really want to know what’s going on. He wants to trust one person. He wants to keep things safe and simple.

Upward managers are bad for the people that work for them. They are bad for the people they manage (their bosses). And they are ultimately very bad for business.

If your boss isn’t giving you credit for your contributions to the success of the business, think seriously about finding someone else to work for. If you have heard “managing up” rumors about someone working for you, have a serious talk with him.  You may discover, as I did, that you have been shirking your primary responsibility… making sure the business is being run the way you want it run.

I saw this little ad in a publication recently:

The Most Recommended Path to the Writer’s Life

No matter what path you want to take to the writer’s life, knowing how to write persuasively is at the heart of it. AWAI’s Accelerated Program for Six-Figure Copywriting gives you everything you need… from learning the skills to getting great clients… and everything in between.

The Accelerated Program comes with 586 pages of training material, 20 practice exercises (plus free critiques!), tips on how to market yourself, access to our member’s-only job board and so much more!

Do you see what’s wrong here?

Right! It describes a product in terms of its features (586 pages of training material, 20 practice exercises, etc.) instead of benefits. The features/benefits rule is the very first thing you learn as a student of copywriting.

Whoever wrote this copy must have forgotten that. This just goes to show something I’ve noticed about skill development. The mistakes that experts make are rarely sophisticated mistakes. They are usually very basic.

Every time I take a walk around a company that I’m working with and talk to employees I hardly know, I discover something interesting about the business. As often as not, that something is a problem.

Some of the problems are small. Some are serious. Many of them are years old. What’s shocking is that they almost always come as a surprise to the CEO.

On a recent walk around, for example, I discovered that there was a glitch in the way orders were processed. (And we’re talking thousands of orders every day.) Not only was it causing week-long fulfillment delays, a shocking number of orders were simply dropping out of the system.

Since the problem had developed over a long period of time, the decrease in revenues looked like a gradual decline in sales that upper management was attributing to a weak market.

After alerting the CEO to the problem, it was solved in less than a month. But during the investigation, it was discovered that at least half a dozen line workers had tried to contact management about it. Somehow, their concerns never reached anyone that paid any attention. I would estimate that the total loss in revenues had been millions and millions of dollars.

I discovered a less-dramatic example earlier this week. When the receptionist in one of the company’s buildings has to leave her desk, she asks the people in the mail room to back her up. But the people in the mail room can’t always hear the doorbell ring. So if you ring the bell when the receptionist is gone (as I did), you are likely to stand there for a very long time.

This isn’t the sort of problem that can (usually) stop your business cold or whose cost can be calculated in dollars. But it can damage your business in small but significant degrees. (In this case, if you consider the fact that it was going on in the building that houses the company’s top brass, you can imagine the impression it was having on VIPs that came by for appointments or meetings.)

Many senior executives I know pride themselves on being “big picture” people. They rely on subordinates to identify problems and solve them. Or at least bring them to their attention if an easy solution isn’t available. That only increases the risk that such problems will arise all over the place and go unnoticed for who knows how long.

When you’re at the top, it may feel like everything is going smoothly. But down below, there could be dozens or even hundreds of flawed processes and protocols that are eating away at your business like termites in a wooden building.

This should not be a new idea to anyone with even limited experience in management. Experts call it “incremental degradation.” It’s a term that’s usually used to describe the process of gradually degrading product quality by chipping away at production costs. However, entropy operates at every level and in every part of every business: customer service, production, fulfillment. Even sales and marketing.

Business termites are a fact of life. And unfortunately, there is no sure-fire, one-step way to identify and exterminate them. But there are several things you can do to keep them to a minimum.

1. Begin by believing that problems are almost certainly popping up all over the place.
2. Don’t take anyone’s word for it that “everything is under control.”
3. Walk around and talk to people, especially the rank and file. They will welcome the chance to tell you what is wrong.
4. Set high standards for every department. Responsiveness to customer queries and complaints. Quality control in marketing and sales. Written objectives, guidelines, and measurements in every operational division, including order taking, data storage and processing, accounting, and product fulfillment.
5. Continuously raise standards and expect your senior people to rise to the challenge. Anyone that is not willing to demand and produce more as time passes should be sacked and replaced.
6. Adopt a corporate policy of something I call “incremental augmentation” – the opposite of incremental degradation and (in my opinion) the single most important way to defeat it. Every one of your employees should understand that good is never enough. Better and better is the only way to keep the business from being eaten away from the inside, one bite at a time.

Dear Mark…

I’m starting a new company, and I need your advice. I will be selling a line of organic, CBD-based health supplements. My target market is women over 40. From reading Ready, Fire, Aim, I know that I want to test my concept quickly to make sure that this is a viable idea. My first thought is to try to get someone with a health-related newsletter or blog to test-market it to their list. Any suggestions would be greatly appreciated.

 Nancy S

Nancy – I can imagine how excited you must feel. You have an idea for a business opportunity that combines something you care about (women’s health) with a burgeoning market (CBD). You may already be imagining your business taking off, propelled by this skyrocketing demand for CBD products.

Let’s put aside the excitement for a minute, though, and return to the basics – including the basic rules of starting a business from zero, as I spelled them out in Ready, Fire, Aim.

There are several cornerstones to starting a business. You need an idea. You need to discover the OSS (optimal selling strategy) for that idea. And to discover that OSS, you need enough money to keep testing different marketing and selling strategies.

Right now, your idea is to go to online businesses and try to persuade them to do some sort of joint venture with you: You supply the product and possibly the sales copy, and they provide access to their audience.

That might seem like a no-brainer to you, but it’s not. In fact, I’d say it’s unlikely you will find a partner of any size (large enough to discover your OSS) because…

You would be going to them with an idea – an idea and nothing else.

I’m pretty sure you know this already, but…

In the world of direct marketing, ideas aren’t worth much, if they are worth anything at all. What has value – from most important to least – are responsive lists, proven promotions,  proven products, and proven ideas.

Your strategy, as you describe it, to go to someone who has a responsive list (the most valuable element) and try to persuade them to do a JV deal with you in exchange for your unproven idea. Do you see the problem?

To your ideal JV partner – someone that has a sizeable women’s health list – ideas for new women’s health products are worth virtually nothing at all.

Remember, the people you are going to be approaching are already in the market. They are on top of market trends. The chances that they aren’t already working on a CBD product for women are very low. And even if your idea had a special twist that they liked… why would they make you a partner just for the idea? It would be easier and cheaper for them to simply take your idea and do it themselves.

(Please don’t take that as a suggestion that you should try to protect your idea legally. Trust me. For a half-dozen reasons, that would be a complete waste of time.)

So what can you do?

You can give up on the idea – which might be the right move. Or you can take into account what I’ve said here and chart a different path.

What sort of path? One that puts you higher up on the value scale.

In other words, don’t go to them with an unproven idea. Go to them with a proven product, and a proven promotion as well.

To “prove” your product, have a batch made and hand out 100 samples to friends, colleagues, and family members. Collect at least a dozen positive testimonials.

To get a proven promotion, you have to write and test a sales letter successfully. In the digital world, this can be done with small ads. In the print world, it can be done with a small mail order campaign. You don’t have to spend a ton of money to see if your sales letter works. But you do have to spend enough to be able to document positive results. Assuming you write the sales letter yourself, you should expect to spend between $10,000 and $20,000 on such a test.

If you can offer someone with a big list not just a “good” idea but a product that has been proven to work, with testimonials, and a proven sales letter, you will have a much better chance of getting the sort of affiliate franchising deal you are looking for.

Hope this helps,

Mark