Making Money 201? Whoohoo … time to have some fun!

I’ve just loaded 14 new videos into the Vault (click on this link, or check the VodPod Widget on the right hand side of this page for the latest) …

Now for today’s post: Part 2 of a 3 part series on weathering the current financial storm …

OK, so we’re all panicking … at least that’s what the media seems to be telling us as 180 year old investing firms crumble, banks crash and the financial markets are in turmoil, even after a $700 Billion ‘rescue package’.

Time to run for the hills?

Well, if meeting average market returns over a long period is enough to satisfy your needs, read yesterday’s post … click the close button on this page NOW (and, also on every personal finance page / news source hot tip / etc. /etc.) … and, live happy my friend: by the time that you retire, the events of today (and, the two or three more ‘meltdowns’ that you will no doubt live through) will be distant memory and you can only hurt your financial prospects by paying any attention to current events … and, I mean any given set of ‘current events’ between now and the day that you sign-off for ever.

But, that’s not you, is it?

You want – nay, need – extraordinary returns, extraordinarily soon … right?!

In that case, maybe it’s time to listen to our good friend Warren Buffett – The World’s Greatest Investor:

“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

– Warren Buffett, 2001.

So, does this seem like a time to be fearful to you … or a time to be greedy?

According to Warren, it’s a time to be … greedy: how?

Well, in the current market, everybody knows that cash is king … so, let’s go and make lots more of it!

Before we take off, let’s do a quick ‘pre-flight’ check; do you have your financial house in order?

Let’s see: your 401k has taken a hit, your house has devalued …

… but, you have little credit card or consumer debt, and you are socking away money regularly. So, CHECK.


Welcome to Making Money 201, which is all about increasing your income through some combination of hard work and risk-taking – the combination that you choose is entirely up to you (and, how ‘steep’ your Number/Date ‘mountain’ will be to climb).

Why do we need more income (besides the obvious!)?

Because, everything financial is on sale right now: stocks, real-estate, loans … the whole box ‘n dice … so, we want to be ‘cashed up’ to take advantage of all the bargains coming our way.

The only problem is ‘market timing’ … take a look at this chart from the Wall Street Journal:

It shows the stock market from 1900 to today, every year across the bottom … but, the right hand side shows a logarithmic (i.e. exponential) scale.

This means that the next move in the market, over a (say) 20 year bull market, will take the Dow Jones from 1,000 to 10,000 … sounds HUGE (and, it is: 10 times your money in 20 years!) … but is ‘only’ an annual compound growth rate of 12%.

The problem, though, is in the RED areas of the chart:

These show the Super Bear Markets – which can be described as FLAT periods in the market that can last 10 to 20 years (if history is any guide) interspersed with volatile short-term up/down movements.

So, I see two possible strategies:

1. Build up CASH

… to be positioned to take advantage of the Next Great Bull Run. Or, maybe we invest in property – I’m sure that we could produce a similar chart.

Here’s what to do: tighten your belt … resign yourself to very limited increase in lifestyle for now … and, take all of your excess income from your full-time business, part-time business, 2nd job, lottery winnings, inheritances, whatever and, buy stocks (and/or real-estate) whenever you can.

Look for bargains in the market (you know, great companies paying good dividends and/or growing profits even now, that have been beaten down to less than 12 to 15 P/E … better is 8 to 10 P/E) and start buying into 4 or 5 of these … and, keep buying! Don’t stop … ever.

This will create your own mini-Berkshire Hathaway, making you a mini-Warren Buffet: you have a ‘cash machine’ (job/s, business/es) and you use it to buy good businesses cheap; then you hold forever. If the price goes down, so what? You simply buy more at the cheaper price as soon as you can afford it. And, if the price of the stock goes up, good fer you, Son … now and go an’ buy yerself some more!

When the market does ride the next wave (one that you will only see in hindsight) you will really see how cheap you got in …

2. Ride the volatility

The first is the ‘safe’ strategy, but will net us closer to 0% growth over the life of the Bear Market than the greater-than-market returns that we need … we need time to ride the downturn and pop out the other end with a basket of great stocks/real-estate assets bought at relatively cheap prices.

But, if you are able to accept some significant risk, there is another way …

Now just might be the time to take a business / trading approach to the market!

In a volatile market, we don’t know from one day/week/month to the next whether stocks will be significantly up or down … but we do know that they will change: often significantly.

This can be an ideal time to speculate with options … but, only with money that you are prepared to lose in the hope that the upside justifies the risk.

Sounds a lot like a business, doesn’t it? Which is why this is an ideal Making Money 201 Income Building Strategy for those who can stomach the ride.

What do I do?

Pick a stock that you like, but that has great volatility … ‘tech’ stocks are ideal for this (AAPL, RIMM, etc., etc.) and buy an equal quantity of PUTS and CALLS at the smallest gap around the current stock price. Sometime during the month, in a volatile market like this, it’s a reasonable bet (at least, I like to think so) that the price will change. If it does – by enough of a margin to pay for the cost of the options – you win!

Of course, you could flip/trade houses, if you prefer real-estate … but, the strategy is essentially the same: add value from volatility and/or sweat to ‘create’ returns in an otherwise generally flat market.

So, if you’re in Making Money 201, why don’t you share with us what you are you doing to not only weather the storm, but profit from it?

How to see through a job disguised as a business …

The best way to give up your ‘day job’ is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at ….


Lots of people come up to me to proudly tell me about their wonderful, growing businesses … how do I look them in the eye and tell them that I really think that what they have is actually a job?

… and, no, I’m not just talking about the obvious: the accountant, doctor, attorney who earns an income from their own labor, whether individually or in a partnership.

Anthony asked me to post on this (I had said I might … so, I guess he was just encouraging me!), when I mentioned in a recent post that I would comment on this exact topic: 

You should. I want to start my own business in an artistic field and every-time I think of having an employee create my vision, I shudder, just a little bit. That’s where modelling someone comes in. Model those who were able to export their vision to other people.

To me the difference between a ‘job disguised as a business’ and a ‘true business’ is:

1. Could it run 3 months without you?, and

2. Can you sell it?

The first point is self-evident: no employees/partners = no ability to run without you (unless, you can totally automate your business … in which case, call me … I want in!).

Therefore, no business!

The second point is a bit more subtle: if the business is not saleable (a) it probably also fails the first point (i.e. no employees), and (b) you are tied to the business and it is tied to you … when you stop, the business stops … when the business stops (market changes, product life-cycles end, etc.) … you (at least your income) stops.

To me, that’s a job; sure, it’s a flexible job with extra benefits … but, a job none-the-less, just like that ‘self-employed’ accountant/doctor/etc.

Now, how do you make a ‘glorified job’ into a true business?

First, you create Positions in your company!

Now, the business may be you, your Mom and your Dad (that’s a whole series of other posts right there!) … but, if you are going to morph into something that meets our two requirements (i.e. runs without you; and, is saleable), then you are going to need to create a simple Management Structure:

CEO (the gal who runs the show); CFO (the guy who runs the finances); Sales/Marketing Manager (the guy who brings in the business) … right on down to Mail Girl.

If there’s only one, two, or three of you … well, you’re each going to be wearing lots of hats for a while. The key is, though, that each ‘hat’ (i.e. position) has only ONE person who wears it! Only ONE of you gets to be CEO (now, I let me know when you have your first Owner’s Meeting … I sure want to be a fly-on-the-wall wall for that!).

Now, for small businesses it can be very difficult to understand this concept, so try this one one:

When the OWNERS walk in the door, they become EMPLOYEES … when they leave at the end of the day, they become OWNERS again. Simple … critical!

Next you create Systems!

You need to get down and document absolutely everything that you (and everybody else!) does in the business.

As Michael Gerber (whose ground-breaking book, The E-Myth Revisited, taught me everything that I know about business!) says, you should act as though your business is a prototype and that one day there will be 500 more just like it.

Even if your little store is ever going to be the only one, this step will allow you to easily grow and add staff, and sell the business … because the purchaser will see how well everything is documented.

Of course, if you’re like me, you could never believe that your business can run without you … here’s how I learned otherwise:

In the early days of one of my businesses, every file would come to me for approval … now, I had experts – trained in the field in which we were operating (compared to me: I was self-taught when I decided to get into that particular business!) – yet, I still checked every major file.

Eventually, my staff stopped bringing me every file … gradually, at first (they’d ‘forget’ to bring me one here and another one there).

When I didn’t notice – because I was so damn busy, running myself ragged doing ‘other stuff’ – they conveniently ‘forgot’ to bring more and more files to me until, they stopped bringing any to me for approval at all!

If I had noticed, would I have got so upset that I would have fired somebody? Probably. Ego does that.

Did the business run any worse after they stopped bringing me the files? Of course not … I said they were trained, and I wasn’t! I just needed a lesson in faith and trust.

So, that’s how I was gently pushed out of Operations and never again stepped a foot back in … in ANY of my  businesses.

But, I was CEO … without me at the helm the business would hit the rocks and sink … or, so I thought:

A year or two later, I closed on an opportunity to acquire a business in the USA, requiring me to move countries. I decided to move to the USA (where we’ve been ever since) as this would be a much bigger business – but, at the time, I wasn’t selling any of my overseas interests.

So, I did the responsible thing: I hired a replacement CEO months ahead of my planned relocation …

… who decided to leave less than 6 weeks before my departure for the USA!

Luckily, after a frantic phase of executive search that consisted of me calling the only guy that I thought could do the job (even though he had no direct industry experience) and him saying ‘yes’ immediately (phew!), I found somebody who could start exactly 4 weeks before I was leaving … remember, this is a business that COULD NOT POSSIBLY run without me, and here I was putting in ‘New Guy’ with only 4 weeks ‘training’!

Needless to say, he took over seamlessly, didn’t miss a beat, never called me about ANYTHING (bruised ego on my side!) and, not only did he keep the business running, keep the staff happy, and keep the clients equally happy, he damn well GREW the business!

In his favor, he did have Positions all neatly laid out and filled before he joined, and he did have a whole Operating Manual full of Systems that worked …

… and, in my favor, I had a business not a job! How do I know for sure?

Not too long after, I found a buyer …

How about you? Do you have a business or a glorified job?