The power of bonuses …

Before I wind things up on the subject of partnerships, I just want to summarize my position:

– Having no partners is better than having partners [AJC: I covered my reasoning in this post and in this follow-up post],


– Sometimes, having a partner is the only way that you will get a business off the ground [AJC: as I discussed in this post].

Now, my reasoning on this subject is clouded by my own experience with partnerships – in fact, it’s how I got started in business: a family business.

The arguments that my father and I had were legendary, and the business eventually failed.

Yet, it was the business idea that my father passed on to me (which I was able to resurrect, like a phoenix rises from its ashes) that ultimately lead to my success … because that little ‘reinvented’ business eventually funded my next little business (which WAS my idea) which became a multi-national-much-bigger business which I eventually sold => phew! => still leaving me with my original little business 🙂

Now, I have a number of other little businesses in the works – and, I am ‘working’ almost all of these ones with partners; here’s my somewhat revised reasoning:

1. Three of the businesses are my idea, but my partners are the developers (they are all web 2.0 sites): I am taking a Venture Capital view to these, where I direct the strategy of the companies but others do the work; the idea of taking these partners on is to eliminate a major start-up cost – hence risk – and to retain the IP ‘in house’ without having a huge staff cost. I would hate to lose one of the key developers!

2. One of the businesses that I am negotiating to buy into is also a web startup – not currently very ‘web 2.0’ but I intend to take it in that direction – and, the guy that I am hoping to partner with is the developer. If the partnership or site doesn’t work, I am hoping to ‘blow’ only $50k or so. For me, this is really pocket change [AJC: but, who wants to blow $50k every time they want to ‘play’ with a new idea? I sure don’t! So, I AM taking this semi-seriously 😉 ]

3. The other business that I am negotiating to purchase is major: it will cost me $700k up front and another $800k over the next few years to buy out the current owner, who has successfully destroyed his current business: taking it from $2 mill. annual net profit to break/even or a small loss in just 3 or 4 years through divorce, and pure mismanagement. I am hoping that I can reverse this trend … we shall see. Naturally, I don’t want this guy around!

It’s this last one that I mentioned in my post about bonusing the existing key staff to keep them on, rather than taking them on as partners.

But, the key question is: how do you reward and keep good staff?

The common way is to make them equity partners: give them skin in the business … but, I don’t think you really need to do that, if it’s purely a ‘staff retention’ issue …

In my last business, I had a key employee who moved to the USA with me to help me establish my operations over there … I actually transferred 10 of my best Aussie staff for periods of 6 weeks to 6 months, but three stayed on. And, one of them became more and more key to the success of the US operation.

His salary in Australia was $70,000 (Australian dollars, which was about $55,000 US) but I put him on a ‘bonus payment’ while he was in the US of a GUARANTEED $160,000 (US dollars) total PER YEAR while he remained working for me in the USA.

That was a $100k+ pay rise … he was THAT important!

Not to say that he wasn’t operationally replaceable [AJC: I made sure of that 😉 ], but that he just could take care of a lot of stuff for me that others would struggle with … less stress on me at that time was worth $100k.

Then, when I was approached to sell the US operation, I took even more dramatic steps to make sure that he stuck it out:

Even though a $160k pay packet should have been plenty, you can never be sure how people think …. so, I offered him another $100k as a one-off ‘retention bonus’ i.e. if he stayed on until the sale closed and my final payout was delivered.

Was it worth it?

For him, absolutely … and, for me, you betch’a 😉

In fact, my accountant in Australia also got a bonus – $250k (Australian dollars) – just for helping me keep my businesses alive in the early days (remember when the original business went belly-up, leaving me $30k in debt? He was there to help me negotiate with the banks and turn things around) … and, you should NEVER forget those who were there when YOU were the one who needed help!


PS My ‘$160k + $100k Man’ finally did come back to Australia, and he now works for me in my original little business, which can only afford to pay him $55,000 (Australian dollars) per year; he is happy and I am happy … I told you that you can never be sure how people think!

If it flows, it ebbs …


There are three main ways to make money in the stock market:


Last week we spoke about the disparity between private companies (that sell for 3 to 5 times their earnings) and public companies (that can easily sell for 15+ times their earnings):

‘Value investors’ like Warren Buffett look at what a business is really worth, and buy it when it’s at that price LESS a margin of safety (they usually try and buy when the current stock price values the company at 50% – 80% of the ’sticker price’ i.e. what their discounted future cashflow analysis tells them the company is really worth).

This is the long-but-true road to financial success in the stock market (after all, do you know ANYBODY who has made more from the stock market than Warren Buffett?).


This is what Brandon was referring to when he said:

That’s why the holy grail for private equity firms is the IPO. Buy a company at 5-10x earnings and take it public for a valuation of 15-30x.

You ‘explode’ a company into lots of tiny pieces and, magically, the parts add up to many times the original value … nice.


If the ‘big money’ is made by the great ‘Value Investors’ and the venture capitalists and private equity firms that ‘explode’ companies via IPO’s and capital raisings, where is the SMALL money made and the BIG money lost?

Well, the SMALL money is made by trading the ‘flow’: once the company has been carved up and it’s stock is worth, say, between 15 and 3o times its earnings as Brandon suggests, there is no concensus as to what a stock is really worth … so money is made by trading the ‘flow’ of a stock’s price between the upper and lower estimates of what the ‘market’ thinks the stock is worth.

Now, don’t give me the ‘market is perfect’ spiel because the whole point is that money is made (and lost) by trading stocks between those who BELIEVE the market is perfect and those who don’t!

In fact, come up with ANY theory of how to value a stock and as soon as you buy or sell it, you are betting against the person on the other side of the transaction … you are both betting on FLOW.

Except for one of you it is an ‘ebb’ (they lose) and for the other it is a ‘flow’ (you win) …

…  of course, the flow does have a preferred overall direction … fortunately for us, that is UP.

Over the long run, company earnings (profits) increase due to inflation … and, where the profits go, so does the share price (sooner or later … but, fortunes have been made and lost on the exceptions); but, it is a SLOW increase.

So, how is the BIG money LOST in the stock market?

Simple, look where the BIG money is MADE …

… it’s lost as soon as the FLOW investor buys their stock from either the Value investor or the guy who triggered the initial Explosion, and that loss is passed on – plus or minus the ensuing ebbs and flows – from ‘flow investor’ to ‘flow investor’ until the value dribbles back out of the stock [enter the Value Investor, again].

How do you stack up?

OK, so I’ve found a few online calculators that I don’t like, but it’s time to quit bitchin’ … here’s one that I do like:

Picture 2

This one asks just two questions to determine how your Net Worth ‘stacks up’ against others, by age and by income.

Here’s how I stacked up just before I retired (a.k.a. Life After Work) at age 49 and was still drawing a ‘salary’ of $250k:

[AJC: OK, so I’m ignoring all of my other business and investment income, etc., etc. for the purposes of this particular rant]

Picture 1

Again, the obvious question is: how much SHOULD I have accumulated in my net worth?

Let’s assume that I just want to replace my then-current gross income of $250,000 by the time I reach 60 … a reasonable goal, if you ask me, but still way, way more optimistic than the general population would hope for:

Step 1: $250k is roughly $385,000 by the time I reach 60 … a simple estimate of adding 50% every 10 years to allow (very roughly) for 4% inflation gets close enough to the same result without using an online calculator or spreadsheet.

Step 2: So, if I want to keep the same standard of living – with all the arguable pluses and minuses of grown up kids and greater health and insurance costs … not to mention more green fees 😉 – I’ll need to generate a passive income of at least $385k that, according to our Rule of 20 (which assumes a 5% ‘safe’ withdrawal rate), means we need $7.7 Mill. sitting in the bank (well, in something that will give us a RELIABLE 10%+ annual return).

Step 3: If I plug my starting Net Worth (let’s go for the generous starting average for people on my super-generous assumed current income) into this online annual compound growth rate calculator, I can see that I need just over a 19% average annual compound growth rate between now and then.

OK, so I have my target, now let’s take a look at how likely I am to achieve it (you see, it’s not as bad as it sounds: I can keep adding a % of my salary to my Net Worth, as well as reinvesting any investment gains and/or dividends) …

… to my mind, I’ve had 27 years of ‘practice’ to get where I am today – if I match CNN Money’s ‘profile’ – using:

– How much I had saved when I started working, and

– What % of salary I’ve managed to regularly save over those years, and

– What average investment returns I’ve managed to achieve in that time.

Well, I’ve been working for about 27 years, and I started full-time work with about $6k of car and pretty much nothing in the bank. So, if I plug in my current net worth (again, assuming that it’s what CNN Money says is ‘average’ for my super-high assumed income); what I started with; and 27 years between the two … the calculator shows that I must have averaged 21%, so no problem!

Except that I had to receive massive salary increases to get from my starting salary of $15,000 [AJC: I thought that was huge! And it was … in the early 80’s 😉 ] to my current (assumed) salary of $250,000 … in fact, my pay increases would have needed to average between 11% and 12% every year for 27 years! Now, that’s hardly likely to continue …

So, if I assume an average compounded investment return (e.g. stock market) of 12% for the past 27 years … which seems pretty darn generous, if you ask me … then, I would have needed to be smart enough to save nearly 40% of each pay packet for the entire 27 years (including putting some of it … a lot, I suspect … in my home).

Running that forward (assuming a more sedate, and probably much more likely, 5% salary increase each year until I retire at 60) and I CAN reach my Number!

In fact, I overshoot by about $1 mill., so I can even afford to drop my regular savings rate to ‘just’ 35% of my before-tax pay packet … easy, huh?!

So, it seems doable, except that I see four problems:

1. I need to have a starting salary of $250,000 per year

2. I need to have a Net Worth of at least $1.12 million by age 49

3. I need to be able to save 35% of my GROSS pay packet

4. Even after all of that, I still NEED to work until I’m 60!



PS How DID I stack up at age 49? Easy: $7 million in the bank. What did I start with just 7 years before that? Nothing: I was $30k in debt. So, is it ‘doable’? Absolutely: And, this is just the place to find out how 🙂

Are we all broke sheep?

[pro-player width=’530′ height=’253′ type=’video’ image=’*Rd06n1g0GC8wifx-HvjXsxwOlpn2Skpsbb8pRzsH82CNjTMI47lPVU2MHMBsp*V8xitlm6Ts5H*DgTL/BrokeTheMovie.jpg’][/pro-player]

This should be an interesting movie [thanks to KC for the link!] … interesting because I’d love to know how they plan to fill up theaters with a documentary on the economy.

Expect it to be filled with wonderfully breathy comments like “Warren Buffett has more in common with a great poker player …” Oooooh! 🙂

A fool’s game …

mordred foolsI’m hoping that after today, you’ll never look at stocks quite the same way again … first we need to go back to when Debbie asked how “the value of a company … translates to the price per share?”

Now this is REALLY key:

IF private companies (from your neighborhood hairdresser to the engineering firm in your local industrial estate) sell for 3 to 5 times their annual net profit (i.e. a P/E of 3 to 5), then

WHY do public companies (those traded on stock exchanges around the world) sell for P/E’s of 15+?

There are a number of reasons, but if you had to pick four they would be:

a) Convenience: you can simply buy/sell as much/little of the company as you like,

b) Regulation: by necessity, these companies are well-regulated by the various government overseeing authorities (e.g. in the USA it’s the SEC, amongst others),

c) Transparency: by law, companies are required to disclose everything about their companies so, in theory, the guy holding one share of the company knows as much about it as the majority shareholders [AJC: enter Martha Stewart!],

d) Liquidity: as Brandon said:

P/E ratios are all about liquidity. I can sell my stock in 30 seconds but good luck selling a business in under 6-12 months.

If I had to boil it down to just one factor, I would say that Brandon is right: it’s all really about allowing people who don’t know what they are doing to get in and out really quickly.

Now, think about this: even though, I have never seen this explained quite this way [AJC: so, perhaps I’m the idiot here?!], to me, it explains why (i) Warren Buffett is the richest man in the world, (ii) the best fund managers around can’t ‘beat the market’, and (iii) why the typical investor averages less than 4% return from the stock market and would be better off just leaving their money in cash:

People pay FOUR TIMES WHAT A COMPANY IS REALLY WORTH just for the privilege of not having to worry about getting in and out!

Read that again … before you buy your next stock 🙂

So, stocks have TWO values:

1. Their ‘intrinsic value’ i.e. what the underlying business is really worth, and

2. Their ‘market value’ i.e. what people are willing to pay for the privilege of throwing them around like casino chips.

Traders and speculators (and, aren’t we all?!) buy on the second … but, true investors (e.g. Warren Buffett) buy on the first.

Warren Buffett, and a relatively few investors like him, don’t care about the advantage of getting out quickly … they deal with that by avoiding selling! Sneaky, huh?

So, ‘value investors’ like Warren Buffett look at what a business is really worth, and buy it when it’s at that price LESS a margin of safety (they usually try and buy when the current stock price values the company at 50% – 80% of the ‘sticker price’ i.e. what their discounted future cashflow analysis tells them the company is really worth).

[Hint: because of some of the other advantages that we mentioned, it’s usually when the P/E is around 8]

So, think about it: Warren buys when the stock is valued at much closer to what he thinks the underlying business would be valued at if it were a private company (like that hairdresser) … then, he sells it – if he sells at all – to all of those other suckers out there when the stock gets up to normal valuations: for ‘normal’ read ‘sucker’ 😉

That’s why Brandon also is right on the money -literally – when he says:

That’s why the holy grail for private equity firms is the IPO. Buy a company at 5-10x earnings and take it public for a valuation of 15-30x.

Now, THAT’S a way to make a quick buck …

… but, hang on: if they are MAKING a quick buck selling at 15x – 30x valuations, what are WE doing when we are BUYING AT THAT PRICE?!

When will you be a millionaire?

Last week, I posed the question: how much should you have saved by now?

With the general consensus being that pre-packaged formulas such as “6.1 times your current salary by age 50” mean a hill o’beans because:

a) the best these ‘common wisdom’ formulas will get you to is just over broke by the time you work to 65 (and, not a day before!), and

b) they fail to take into account that YOU need to have saved enough to ensure that you’ve reached Your Number by Your Date.

The corollary question is “when will you be a millionaire?”, one which  CNN Money attempts to answer with this neat online calculator:

Picture 1

The problem with this calculator is obvious … but, in case you missed it, I blew up the bottom-right corner of the above image for you:

Picture 2

Your ‘desired nest egg’ – in this calculator – isn’t variable … it’s One Million … that’s it!

My issue is that plenty of people (fortunately, none of them readers of this blog) – with the support of an ‘authority’ such as CNN Money – still think that $1,000,000 is something to aspire to!

If $1 million isn’t just a hurdle along the way to your Number – and, a fairly early and relatively small hurdle at that – then you are destined for a VERY late retirement or an early trip to the ashram to meditate all day and eat rice at every meal … not that there’s anything wrong with aspiring to Asceticism 🙂


PS I’m sure there’s plenty of other online calculators that will do the job, although I couldn’t find one that accepts >20% annual return and we know that we need more than that! If you find a good one, please post a link in the comments.

Now, that’s hard to bottle!

Over a couple of posts, I posed the question: is your partner worth $5 mill.?

Through some suspect mathematics, I ‘proved’ that partners aren’t worth the price you have to pay (in lost equity) UNLESS they are the ones with The Big Idea!

I bring this up, because a reader (who shall remain nameless, as business plans are currently in motion!) told me:

One of my clients-turned-friends is doing the coding [for my new site].  This was an idea we’ve tossed back and forth for a couple years… he was one of my first clients.  [I worked on his previous] site for 2 years or so, then helped him find a buyer who paid a couple MILLION for the site.  I got a $5,000 bonus…  then we worked on [another site] for a year or two.  I helped him sell that, but for something in the hundreds of thousands rather than a couple million but he gave no bonus! I was a little peeved! I mean, sure, the bonus wasn’t a requirement but … you know, it was sorta expected.  I couldn’t very well say – where’s my bonus?  A couple weeks later he asked if I was interested in collaborating on the project we’ve been tossing back and forth the ideas for, we worked out some stuff and he’s outlaid all the costs and most of the time to get it going.  [W]e’ll barely see 15% of profits [each] when all is said and done  …

[AJC: I had to ‘square bracket’ a bit to protect the innocent … but, you should be able to get the picture?]

I told this reader that this guy has a track record, and 15% of something that costs our reader nothing could turn out to be something worth while! I said: “I guess that’s his bonus ‘gift’ to you ….”

This is the real value of a partner – besides providing the ‘Big Idea’ – if they are the true entrepreneur and you are more the ‘worker bee’ type, then a partnership MAY be the only way that you’ll get a business up and going …

… you see, this guy – and, this is true of many successful entrepreneurs – can show a track record of:

(a) spotting winners i.e. good potential business opportunities, and

(b) spotting winners i.e. good potential people who can help him make them happen.

The ability to spot winners is all that it can take … BUT, that’s a rare skill that’s very hard to bottle 😉

Some housekeeping ….

Share Your Number - Logo - 7m7yI ummed and aahed about it, but three sites is one too many to maintain. So,I finally DID decide to move the home of the Millionaires … In Training! ‘grand experiment’ to our Share Your Number community site – if you haven’t visited that site, yet (or, recently!) NOW would be a great time to bookmark this page and visit often!

Oh, and feel free to join the community at and you, too, can write your own featured posts and ask and answer member questions … what fun!

So, from now on, I hope to see you HERE and THERE 🙂


I want my share!

What is a stock? What is a share? Are they interchangeable, and who even cares?

Well, Debbie does … asking on the Share Your Number community forum:

I understand why you would need to have a good idea of the value of a company if you plan to buy stock in that company – But I don’t understand (and I’m sure this is stocks 101) how that translates to the price per share.

Even though this blog isn’t about Stocks 101 … there are plenty of other places on the web to find that sort of info … this does open up some interesting questions:

For example, even though I owned some of my businesses 100%, they were structured with lots of shares (usually between 100 and 1000).


Well, ‘just in case’ …

… it makes it easy for banks, partners, JV’s, partial sales, etc. to buy in – just transfer them a % of the shares: if you have 1,000 shares (or 100, it doesn’t matter … larger numbers just have more divisors and the ability to make finer and finer ‘cuts’ of the company value) and they are buying 40% of the company, you just give then 400 (or 40) shares.


If you want to be sneaky, you create two classes of shares: A (say, 600 of the shares) and B (the rest), with the voting rights going to the A stock, which you – naturally – keep. You get to sell 40% of the company to some sucker and keep 100% of the control (actually, 60% still should give you majority control, so it’s not such a big deal, anyway)!

Unfortunately, for my New Zealand Joint Venture (fancy term for ‘partnership’), where I owned just 40% of the stock, that wasn’t possible … and, for my US JV, where I ‘controlled’ the company with 51% of the stock, there were so many “by unanimous agreement” clauses written into the shareholder’s agreement, I couldn’t blow my nose without seeking my partner’s approval, first 🙂

So, the first lesson we learn about stock is that numbers and/or percentages CAN matter less (or more) than you think … it’s all in the fine print 😉

Public companies are the same, except that they are usually (a) huge, and (b) divided into LOTS of small pieces (1,000,000+) so that people can buy very small chunks of the company, and trade them very easily i.e. for small sums of money.

These shares/stocks are traded on public stock exchanges, which are heavily regulated to make up for the fact that ‘idiots’ like me buy small pieces of businesses without the effort or forethought that they would put into buying the WHOLE business: we take all the risks without any of the business controls.


And, that’s why the stock market is more akin to a casino than to ‘real’ business or investing … we have no control, and only limited understanding of the underlying business that we are – in effect – buying into.

Now, here’s Josh to answer the second part of Debbie’s question (“how that translates to the price per share”):

If you think a company is worth 1 billion and there are 100 million shares outstanding, the price you think the shares are worth are 10 dollars each. Of course you want to wait until you have the opportunity to pay less then this.

So, if you would be willing – that is, if you were Warren Buffett instead of Jane Doe – to buy the whole company for $100,000,000 and it had 1,000,000 shares, then you should be willing to buy one (or each) share for $100. Except, Warren reads the financial reports and calls the shots, while we read Money Magazine and wait patiently (what other choice do we have?!) for our dividend check 😉

This leads to some other key numbers:

In a private company, we have sales and profits.

In a public company (i.e. traded on a stock exchange), we also have sales (or ‘revenue’) and profits (or ‘earnings’), but we can now also divide each of those by the number of shares available to come up with numbers like Revenue per Share and (more importantly) Earnings Per Share.

Also, if we COULD buy the whole company for $100,000,000 and it had a 25% profit margin, then for each $100 share we buy, we would expect $25 in company profits … which means the company is now selling for a Price/Earnings Ratio of 4.

Which leads me to the Grand Mystery of the Stock Market:

If a P/E of 4 is right on the money for a private company (they typically sell for 3 to 5 times annual profit/earnings) why is a P/E of, say, 15 for a publicly traded stock the ‘norm’ and a P/E of 8 to 12 times earnings so damn cheap that even Warren Buffett might buy the stock by the truckloads?!

[AJC: I know the answer … but ‘knowing’ doesn’t make it right 😉 … do you know the answer?]

So, Debbie – in case you’re worried about asking a 101 question – please remember: there’s no such thing as a bad question, only a bad answer 😛

How much should you have saved by now?

datesThis is rapidly appearing to become a blog about your Number … of course, that’s not the case: it’s a blog about money, specifically about how to make $7 million in 7 years, but you can pretty quickly see that having a real financial goal in mind is a powerful focusing tool.

It’s also a ‘comparator’ – a tool to use whenever you are presented with two financial alternatives … for example, Scott who is deciding how many clinics to open: 1, 2, or 3+ [Hint: only one of these is the right answer, and it’s not the obvious one!] … it was ONLY by having a clear understanding of his Number / Date that he came to this conclusion.

Without that understanding, Scott could have made a terrible (OK, far better than terrible … more, non-optimum) decision that would have had the opposite effect to that intended: it would have committed him to working for 10 to 20 more years.

So, now that I have provided the hint, let’s look at today’s conundrum, posed by Money Magazine in March 2008: how much money should you have saved by now?

Well, given the current market the chances are that what you have saved has halved, but what you should have saved hasn’t … bummer 🙂

But, here’s what Money Magazine advises; to see how much you should have saved by now:

If you are age 45 multiply your current salary by 4.1
If you are age 50 multiply your current salary by 6.1
If you are age 55 multiply your current salary by 8.5
If you are age 60 multiply your current salary by 11.4

So, if I said my current salary was $250k (well, that’s what I most recently paid myself before I retired), then I should have saved $1.525 million by now …

Can you see the obvious problem?

Well, it assumes that I am going to want to keep working for another 15+ years!

Why? Simple: $1.525m can only support a ‘safe’ 5% annual withdrawal rate of $76,250 (before tax) … so, unless I want to take a HUGE pay-cut, I’m going to have to keep working until I’ve saved at least $5 million … lucky that’s exactly what I did 😉

So, here’s how you should calculate how much you should have saved by now:

1. Calculate your Number,

2. Decide your Date,

3. Subtract your Current Net Worth from 1.

4. Subtract today’s date from the Date

5. Divide 4. into 3.

That’s how much you need to have saved each year between now and your Date, if you want to reach your Number.

Now, you can get fancy and use an online compounding calculator to do the year-upon-year calculations, but this is a good place to start.