All business operates on a simple premise. One person creates value for another. Outside of gift-giving and other types of benevolence, the creator gets paid. He or she receives value, often in the form of money, and both partners to the trade are better off than they were before.
Many forms of value are obvious. Clothing, shelter, food, and the people who create them are valuable because we need those basic things to survive. Music, paintings, sports and other non-essentials improve our lives even though we could live without them. But they too are commonplace and obvious.
Many people who start businesses are stuck in the obvious. They try to provide more of what others are already providing quite well: dry cleaners, groceries, web design, etc. There is nothing wrong with opening this kind of business. If you can do it better, faster, or cheaper than your competitors, you may do well. But why butt heads with the rest of the market?
Each of us has value to others that may have gone unrecognized. We may know how to do something unique or make something unusual that is valuable to 0thers. But how does one discover these hidden veins of value? Start by brainstorming fifty ideas for businesses. Don't criticize or question any idea, just write down fifty. Even if some turn out to be "obvious" keep writing. Chances are, you will find something valuable that only you can provide.
The next step is refining your idea into a business model. A business model takes your initial idea and builds around it a "delivery system" that allows you to get paid for what you do well. More on business models next post.
Wednesday, February 25, 2009
Wednesday, February 18, 2009
What is an Asset?
Accountants, financial advisors, and the popular press talk constantly about "assets." Most people have only a vague notion of what an asset really is. My favorite definition comes from the book Rich Dad Poor Dad. An asset puts money in your pocket. A liability takes money out of your pocket.
Let's think about that a minute. What kinds of things take money out of your pocket? Well, that bass boat sure does. Unless you make a heck of a lot of money fishing, more money goes into the monthly payments and upkeep than comes out in the form of income. If you are like most of us, you don't expect any money to come your way on account of that boat. That, friends, is a liability.
This is not being judgmental, by the way. If you enjoy fishing, buy that boat by all means. As long as you have the money, live it up. In the case of a pleasure boat, no one really expects to make money. But what about your house? Haven't you always been told that it is an asset? The truth is, it takes money out of your pocket too. Even if you have paid it off, you are still spending money on upkeep, utilities, and insurance. That makes your house a liability. But don't you make money when you sell? Try that about now. And even if you could sell it, where would you live?
The only thing that truly counts as an asset is something that puts money in your pocket. Assets are money machines. When you put some amount of money in an asset, you expect to receive more money than you put in at some point in the future. There are two ways to accomplish this. One is for the asset to throw out a stream of money like, say, a savings account. (I know. It's not much of a return, but stay with me.) As long as you keep that money in the account, you earn money. Another example is a stock that pays a dividend.
The second way for an asset to make money for you is appreciation in value. Imagine buying a Silver Eagle coin for $15 and selling it six months later for $20. This type of asset makes you money, but you have to sell it to realize the gain. House flipping was a popular form of this type of investing until the housing market crashed.
A successful business is a tremendous asset. By building a business, you can realize both kinds of return. A business creates an income stream as long as you own it. If you build it the right way, you can also sell it at some point for much more money than you put into it. Another great thing about building a business is that you can put much more than just money into it. You can put your know-how, your time, your social network, and your creativity into it. The bank does not care what I know or how hard I am willing to work when I open a savings account. I park some cash and it works for me for the rate determined by the bank, end of story. A business gives me an opportunity to capitalize on things other than money.
It all comes back to value. All businesses operate on the principle of creating value that other people are willing to pay for. Many times, we vastly underestimate how valuable we are to others because we are stuck in the J-O-B trap. Chances are, you have much more potential value than you realize. Next week, we'll take a look at some ways to tap that hidden value.
Let's think about that a minute. What kinds of things take money out of your pocket? Well, that bass boat sure does. Unless you make a heck of a lot of money fishing, more money goes into the monthly payments and upkeep than comes out in the form of income. If you are like most of us, you don't expect any money to come your way on account of that boat. That, friends, is a liability.
This is not being judgmental, by the way. If you enjoy fishing, buy that boat by all means. As long as you have the money, live it up. In the case of a pleasure boat, no one really expects to make money. But what about your house? Haven't you always been told that it is an asset? The truth is, it takes money out of your pocket too. Even if you have paid it off, you are still spending money on upkeep, utilities, and insurance. That makes your house a liability. But don't you make money when you sell? Try that about now. And even if you could sell it, where would you live?
The only thing that truly counts as an asset is something that puts money in your pocket. Assets are money machines. When you put some amount of money in an asset, you expect to receive more money than you put in at some point in the future. There are two ways to accomplish this. One is for the asset to throw out a stream of money like, say, a savings account. (I know. It's not much of a return, but stay with me.) As long as you keep that money in the account, you earn money. Another example is a stock that pays a dividend.
The second way for an asset to make money for you is appreciation in value. Imagine buying a Silver Eagle coin for $15 and selling it six months later for $20. This type of asset makes you money, but you have to sell it to realize the gain. House flipping was a popular form of this type of investing until the housing market crashed.
A successful business is a tremendous asset. By building a business, you can realize both kinds of return. A business creates an income stream as long as you own it. If you build it the right way, you can also sell it at some point for much more money than you put into it. Another great thing about building a business is that you can put much more than just money into it. You can put your know-how, your time, your social network, and your creativity into it. The bank does not care what I know or how hard I am willing to work when I open a savings account. I park some cash and it works for me for the rate determined by the bank, end of story. A business gives me an opportunity to capitalize on things other than money.
It all comes back to value. All businesses operate on the principle of creating value that other people are willing to pay for. Many times, we vastly underestimate how valuable we are to others because we are stuck in the J-O-B trap. Chances are, you have much more potential value than you realize. Next week, we'll take a look at some ways to tap that hidden value.
Tuesday, February 10, 2009
What is Money?
If your answer is the green stuff in your wallet or purse, go to the back of the line. The paper we all carry is a facsimile, a representation--a marker, really, for real money. It is fake. It works well in the place of real money, but only under certain conditions.
The idea behind money itself is brilliant. We can imagine how the first humans developed the barter system--you make arrows better and I make blankets better. Hmmmm...maybe we could trade and both be better off. Free trade ranks as one of humanity's crowning achievements. As we grew in intelligence and sophistication, the barter system became cumbersome. If you did not happen to need blankets at the same time I needed arrows, we were out of luck.
Money was invented to "mark" an asynchronous exchange of value. That is just a fancy way of saying that one of us could store the value he/she had created for future use. Neat idea, huh? The only problem was what to use for a marker.
Not just anything would do. In order for something to serve as money, it had to be durable, portable, and rare. Durability allowed value to be stored safely. No good using a tree leaf if it disintegrates before it can be spent. Portability allowed the value to be transported over large distances, thus expanding trade to the benefit of all. Those two characteristics are fairly obvious, and real money over the course of human history has nearly always been durable and portable. But why rare?
Rareness is a desirable characteristic for money to have because it needs to represent the value that is created and stored by the holder. If we were to use any old seashell, everyone could become rich by going to the beach. Something is wrong here, though. How can everyone become rich by picking up seashells? The answer is, they can't, though our government believes they can. This is the primary reason we are all facing the biggest financial crisis in decades.
Money is not usable. We can't eat it, can't wear it, and can't cure disease with it. What we want is the value behind it. If I am sick, the only reason I want money is to purchase your services as a physician. That seashell is worth only what I can trade it for. If the supply in a particular economy (let's say a village) gets too high, its value goes down. Soon it takes a bushel basket full of shells to purchase what three shells would purchase before.
The reason shells become worthless is that anyone can get them without providing any tangible value to anyone else. Over thousands of years, two main materials have emerged that prevent such flagrant abuses of the idea of money--gold and silver. Yes, some people acquire wealth by digging up gold or silver, but it is a lot of trouble and the supply is limited. In a sense, the miners of precious metals earn their value by providing the rest of us with a solid standard of exchange.
Gold and silver became the only real money not because anyone decreed them to be so, but because people in general recognized them as money. Governmental interference came much later, mostly with undesirable consequences.
Today, our government is creating currency hand over fist. All this in the name of "saving the economy." Note that I said "currency," not money. Did you ever wonder where that now nearly one trillion dollars comes from? They create it out of thin air. It represents no tangible value whatsoever. Like the village I just spoke of, our politicians are going to the beach, gathering shells, and calling it money. Oh, and they force us to use it as money. That is why you see "This note is legal tender for all debts, public and private" on our currency.
Our nest eggs all got hammered last year because we were counting on currency. We all thought that we would be able to trade what we thought was money for things we will want and need when we retire. Not likely. If your portfolio was mostly stocks, bonds, and mutual funds, you have been had. If you thought that Social Security would allow you to at least buy food and shelter and that Medicare would pay your doctor bills, think again.
The good news is that we do not have to sit and take this. No, I do not mean storming Washington, much as I love to dream of that. I mean that living the life you want to live and being able to retire comfortably now requires more courage and savvy than ever before. Next week, I will explain why you must learn what assets are and how you can start creating them.
The idea behind money itself is brilliant. We can imagine how the first humans developed the barter system--you make arrows better and I make blankets better. Hmmmm...maybe we could trade and both be better off. Free trade ranks as one of humanity's crowning achievements. As we grew in intelligence and sophistication, the barter system became cumbersome. If you did not happen to need blankets at the same time I needed arrows, we were out of luck.
Money was invented to "mark" an asynchronous exchange of value. That is just a fancy way of saying that one of us could store the value he/she had created for future use. Neat idea, huh? The only problem was what to use for a marker.
Not just anything would do. In order for something to serve as money, it had to be durable, portable, and rare. Durability allowed value to be stored safely. No good using a tree leaf if it disintegrates before it can be spent. Portability allowed the value to be transported over large distances, thus expanding trade to the benefit of all. Those two characteristics are fairly obvious, and real money over the course of human history has nearly always been durable and portable. But why rare?
Rareness is a desirable characteristic for money to have because it needs to represent the value that is created and stored by the holder. If we were to use any old seashell, everyone could become rich by going to the beach. Something is wrong here, though. How can everyone become rich by picking up seashells? The answer is, they can't, though our government believes they can. This is the primary reason we are all facing the biggest financial crisis in decades.
Money is not usable. We can't eat it, can't wear it, and can't cure disease with it. What we want is the value behind it. If I am sick, the only reason I want money is to purchase your services as a physician. That seashell is worth only what I can trade it for. If the supply in a particular economy (let's say a village) gets too high, its value goes down. Soon it takes a bushel basket full of shells to purchase what three shells would purchase before.
The reason shells become worthless is that anyone can get them without providing any tangible value to anyone else. Over thousands of years, two main materials have emerged that prevent such flagrant abuses of the idea of money--gold and silver. Yes, some people acquire wealth by digging up gold or silver, but it is a lot of trouble and the supply is limited. In a sense, the miners of precious metals earn their value by providing the rest of us with a solid standard of exchange.
Gold and silver became the only real money not because anyone decreed them to be so, but because people in general recognized them as money. Governmental interference came much later, mostly with undesirable consequences.
Today, our government is creating currency hand over fist. All this in the name of "saving the economy." Note that I said "currency," not money. Did you ever wonder where that now nearly one trillion dollars comes from? They create it out of thin air. It represents no tangible value whatsoever. Like the village I just spoke of, our politicians are going to the beach, gathering shells, and calling it money. Oh, and they force us to use it as money. That is why you see "This note is legal tender for all debts, public and private" on our currency.
Our nest eggs all got hammered last year because we were counting on currency. We all thought that we would be able to trade what we thought was money for things we will want and need when we retire. Not likely. If your portfolio was mostly stocks, bonds, and mutual funds, you have been had. If you thought that Social Security would allow you to at least buy food and shelter and that Medicare would pay your doctor bills, think again.
The good news is that we do not have to sit and take this. No, I do not mean storming Washington, much as I love to dream of that. I mean that living the life you want to live and being able to retire comfortably now requires more courage and savvy than ever before. Next week, I will explain why you must learn what assets are and how you can start creating them.
Thursday, February 5, 2009
"I'm not dead yet." scene from Monty Python's Holy Grail
"In the long run, we are all dead." John Maynard Keynes
This ranks as one of the most irresponsible remarks in the history of humanity. Keynes may have filled his own prophecy. He is dead. We are not--at least not yet. But we are living in Keynes' long run and we are about to find out how wrong he was.
Keynesian economics called into question the premises of the classical theory that preceded it. Keynes thought that laissez-faire capitalism, the freedom of individuals to trade with little or no interference from the government, would lead to sub-optimal outcomes for the economy as a whole. He advocated a more aggressive role for government to counterbalance business cycles and to promote economic well-being through "stimulus" spending.
Little wonder that politicians embrace his message. Keynes' invitation to spend, spend, spend is like telling an alcoholic to drink, drink, drink. The only difference is that taxpayers get the hangover. A huge economy like ours is a hard thing to break. Because we have, at least up until now, retained enough economic freedom to entice bright people to create and sell things we all want and need, we have survived. Until last year, we even gave off the impression of having prospered. That is, until millions of retirees watched their portfolios implode. Welcome to the long run.
Many of us with limited-government sensibilities thought the last nail had been driven into Keynes' coffin two decades ago. As it turns out, he may drive the last nail into ours. Obama and his Democratic allies in Congress have conjured up his spirit, invoking heroic images of FDR, the imagined savior of the Great Depression. And lest you think this is a Republican-friendly blog, they are no better. If anything, they are more devious, pretending to prefer less government while spending like inebriated seamen. In a way, Democrats are the streetwalkers of American life. They don't pretend to be anything but what they are or they are too stupid to hide it. Republicans are call girls, cleverly pretending to be respectable, but eager to go spread-eagle for a slightly higher fee.
No amount of ranting about politicians, cathartic as it may be, will help any of us. The system has been rigged over a period of decades and is now beyond repair without radical changes. Don't hold your breath waiting for politicians to learn anything. What will help us as individuals is a realistic preview of what is about to happen and how to protect ourselves. This time, folks, it is different. We are beyond arguments about what government should do. We are about to find out what they cannot do.
This ranks as one of the most irresponsible remarks in the history of humanity. Keynes may have filled his own prophecy. He is dead. We are not--at least not yet. But we are living in Keynes' long run and we are about to find out how wrong he was.
Keynesian economics called into question the premises of the classical theory that preceded it. Keynes thought that laissez-faire capitalism, the freedom of individuals to trade with little or no interference from the government, would lead to sub-optimal outcomes for the economy as a whole. He advocated a more aggressive role for government to counterbalance business cycles and to promote economic well-being through "stimulus" spending.
Little wonder that politicians embrace his message. Keynes' invitation to spend, spend, spend is like telling an alcoholic to drink, drink, drink. The only difference is that taxpayers get the hangover. A huge economy like ours is a hard thing to break. Because we have, at least up until now, retained enough economic freedom to entice bright people to create and sell things we all want and need, we have survived. Until last year, we even gave off the impression of having prospered. That is, until millions of retirees watched their portfolios implode. Welcome to the long run.
Many of us with limited-government sensibilities thought the last nail had been driven into Keynes' coffin two decades ago. As it turns out, he may drive the last nail into ours. Obama and his Democratic allies in Congress have conjured up his spirit, invoking heroic images of FDR, the imagined savior of the Great Depression. And lest you think this is a Republican-friendly blog, they are no better. If anything, they are more devious, pretending to prefer less government while spending like inebriated seamen. In a way, Democrats are the streetwalkers of American life. They don't pretend to be anything but what they are or they are too stupid to hide it. Republicans are call girls, cleverly pretending to be respectable, but eager to go spread-eagle for a slightly higher fee.
No amount of ranting about politicians, cathartic as it may be, will help any of us. The system has been rigged over a period of decades and is now beyond repair without radical changes. Don't hold your breath waiting for politicians to learn anything. What will help us as individuals is a realistic preview of what is about to happen and how to protect ourselves. This time, folks, it is different. We are beyond arguments about what government should do. We are about to find out what they cannot do.
Welcome to Empty Nest Egg
Welcome to the first in a series of posts on the topic of our current financial crisis. I teach entrepreneurship at the university level and have spent a large amount of time researching and thinking about how and why people start businesses. Some want to, perhaps because they do not like working for someone else or they hate working by the clock. Others are interested in achieving great wealth, something that is next to impossible with a job.
The events of 2008 have created another compelling reason to start a business. Many of us will simply have to. Though I am at my core an optimist, I believe that we have reached a tipping point. In the blink of an eye, we have seen the imminent collapse of our largest financial institutions, insurance companies, and automakers. Job layoffs are increasing rapidly, as are foreclosures. It is not pretty and it will get worse.
My purpose in writing this blog is twofold. First, I want to offer my interpretation of these disturbing events. The mainstream press has done an abysmal job of exposing the real culprits in our descent into economic madness. Second, I want to offer readers a way out. While the next few years are going to be a rough ride, those who are willing to learn some basic business skills and to question their previously held assumptions about the relationship between government and the economy have the opportunity not only to survive, but to prosper in the coming years.
The events of 2008 have created another compelling reason to start a business. Many of us will simply have to. Though I am at my core an optimist, I believe that we have reached a tipping point. In the blink of an eye, we have seen the imminent collapse of our largest financial institutions, insurance companies, and automakers. Job layoffs are increasing rapidly, as are foreclosures. It is not pretty and it will get worse.
My purpose in writing this blog is twofold. First, I want to offer my interpretation of these disturbing events. The mainstream press has done an abysmal job of exposing the real culprits in our descent into economic madness. Second, I want to offer readers a way out. While the next few years are going to be a rough ride, those who are willing to learn some basic business skills and to question their previously held assumptions about the relationship between government and the economy have the opportunity not only to survive, but to prosper in the coming years.
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