In a change of pace we’re going to talk about the past and emphasize how quickly things can change in just 5-10 years. In such a short period of time it is possible to switch from being a “consumer” to a “producer”. It is possible to start billion dollar companies and it is is possible to change your life in a positive or negative direction quite dramatically. The odd thing about making dramatic shifts is that you have an extremely hard time remembering how it all happened. There is no “one event” that signifies a shift but more of a snowball of events that occur getting you to the destination. Hopefully a lot of the items below will either be 1) something you relate to or 2) something you will relate to in about 5-10 years.
Producer vs Consumer Calendar: These calendars are not the same at all. Say what you will about “every rich person is different” but there are always a lot of similarities. Here are a few: December and January are some of the worst months. New years isn’t much of an event as you’re usually planning real events (promotions, products etc to start off 2019) which occur in January. February and March is a nightmare due to tax season and organizing an insane amount of paperwork. April – June is more stable. July – August is significantly more relaxing. September-October is similar to June and July. That’s a good general guideline of what a year looks like for someone who is in the producer camp. In fact, this kind of helps explain the whole “miserable rich person” stereotype/belief. During the holidays they are much more focused work and the last thing they are worried about is decorations (they are probably the ones shipping all those items!)
The consumer calendar or what we would call the normal person calendar is just not the same. If you’ve been in the lower class or middle class its pretty similar in terms of the calendar. January – March there is a lot of work as most people in this group are employees trying to ramp a new product/business line. April is okay since there is no significant work for a W-2 filing. May is similar to February. June to August is relaxing as most of the higher ups are on vacation. September – Mid-November is a last second grind similar to January to March. Mid-November to December is incredibly slow. This is quite different from the prior paragraph and should give a good overview of how your own priorities will change.
As a fun note to sign off on this sub-section, 2018 was the first year where no contacts messaged with “what are you doing for New Years”. Everyone already knows what is happening… Absolutely nothing. You’re spending your time ramping on new projects and trying to set up 2019 so that your total income is up year-over-year. No guarantees on your income, but, working hard when everyone else is busy watching football and eating is usually a good formula for success.
Billions Over 10 Years: When you go out at night it’s hard to remember how fast things have changed. We’re using a few years of wiggle room. But. There was no iPhone, no Uber/Lyft, no Instagram and no Airbnb. Sure the first iPhone came out in 2007 and Airbnb was founded in August 2008, yet the point remains… A ton can change in just 10 years. In fact when you go out to eat, drink or party, the chances you talk to someone who was born to remember life “before the internet” is quite slim. At this point it is hard to remember flip phones let alone life before WiFi. The main point here is that you only really need one good product to get rich. Realistically we’ll take the under on creating the next Uber since the chances are so slim… But… Creating $100,000 or $200,000 business? Sure easily achievable. This is not a “for us comment” and is a for “for you” comment as we think it’s possible for quite literally anyone.
Flipping it around to the potential negative… in a word socio-economic changes. Taking a look over the last 10-years you’ll have to chalk up a lot of success to luck. In fact, we’d question anyone who does not believe in luck if they made it to a million dollars or more (you need a little luck) in a short time frame. Luck cuts both ways and many people can fall into the “Have Nots” quickly. This is something we’ve noticed in dramatic fashion. By the time people are 30 they are squarely stuck treading water or they’ve made enough money to not have serious worries ever again. It is excruciatingly rare to see someone in-between and if they are it’s usually someone with more time freedom and a not as much money (traveling but clearing $80-120K a year). The #1 cause of this downfall based on our own analysis is relying on a single form of income to pay bills. Looking back, having a secondary source of income that can cover at least 40-50% of your living expenses is enough to change your life forever. If you were making around $100,000 a year after taxes and another person was making $60,000 and $40,000… We’ll bet on the second guy making it 10 times out of 10. There is something mental/physiological that happens when you realize you will always have some money coming in. It makes your main income producing work improve and at the same time your cash flows will unlikely go into the red any time soon.
What does this mean? It means we wouldn’t be surprised to see more tension between the “haves” and the “have nots” over the next few years. There has been a distinct cultural shift that is difficult to ignore unless you’ve stayed in a bubble the past decade. More and more people are searching for ways to make it into the “top of the triangle” and the people at the top are becoming more and more annoyed at the constant asks. Unlike the positive solution in the above paragraph we have no answer to this one. As more and more automation comes out and it becomes harder for individuals to add value to a process, this will lead to more consolidation of money to the top. If you’re good at reading between the lines, this is one of the reasons why we’re against student debt for anything that can’t be paid back rapidly (a year or two post graduation). It is related since student debt forces the graduate to “break even” for several years before being able to gain any investment momentum.
What Used to Work Changes: One of the main reasons why generational wealth doesn’t work and why parents aren’t always the best people to ask for advice is this: change of value. 30 years ago it made complete sense to go to college. No one was doing it and it would get you far ahead in a legitimate career. This is the same for the typical MBA program as well where obtaining a top tier MBA resulted in a significant increase in earnings. If you look at the same strategy today… the Math doesn’t add up so well. The hardest part about looking back on what worked in the past is admitting that it is no longer a viable strategy. Similarly, if you go back and look at interest rates in 2006, they were at 5%… If this blog was around then it would say “just park your money in 5-6% returns and focus all your energy on a business/career”. Instead that strategy blew up and had to be revised.
While these items are all in hindsight, if we look at what is happening today.. the same repeated mistakes are happening again. A good example of this is going into a fund raising position. While this has historically been a smart way to make money as you’re taking a spread on large money raises, the space is becoming less and less lucrative. Spotify direct listed for an IPO without fees and Slack may do the exact same. At the lower levels of fund raising it is also becoming easier and easier to obtain money directly from individuals and this is only going to accelerate in the future. As this continues (that’s our bet of course so it is biased), what you’re going to see is a contraction of fees and more value being shifted to positions where actual returns can be justified. The easiest example would be real estate where the agent can at least add to the process by helping you negotiate a higher/lower price and build a business around being an exceptional seller/buyer. This adds a lot to the process and is completely unrelated to someone simply connecting two people who have never met (becoming increasingly easy to find them via a search or your own personal contacts).
For fun if we look back over the last 10 years here are some things that no longer work: 1) levering up for education without specific knowledge and the ability to repay quickly, 2) ignoring the stock market and having risk free returns drive your net-worth, 3) paying for any type of education that leads to no increase in income, 4) working in a position that can be quickly automated – vast majority of ad purchasing and bulk of manual labor and 5) large number of brick and mortar businesses due to high-cost and barriers to entry (Amazon killing pricing by commoditizing the offering). There are a lot more but we picked out 5 that are difficult to argue against – even for the people who don’t understand statistics and enjoy the whole “exception to the rule argument”. Also as a note, one strange industry has stood the test of time and that appears to be real estate. At the end of the day people need somewhere to live so it’s hard to shoot blanks here.
Physics Applies to Life: “Objects in Motion Stay in Motion”. While this is a phrase usually reserved for physics we’d say it’s a much better rule for life in general. If you have upward momentum or downward momentum… it is quite difficult to turn that ship around the longer you stay in that same direction. A good way to think about it is added weight. If you’re in the ocean and driving a boat, every year weight is added to the boat. By the time you’re 40-50 years old or so, the direction is already set and you can’t really do much to suddenly change course unless a dramatic event occurs. You’re either headed to live in Antarctica at that point or Miami Beach.
To see if someone is moving in the right direction is based on how much they have invested as a percentage of total earnings over a 10-year span. Add up all of the earnings over a 10-year period (after taxes of course) and figure out how much the person has kept. We’d go ahead and wager that if the number is below 25-30% or so… momentum isn’t on their side yet. This only gets exacerbated over time. If someone has made $2M over the course of their 10 year frame and has $1 million that isn’t even close to someone with $500,000 as they are 7-10 years behind already. The difference is less related to the dollars they have and is more related to the time that they can purchase. The first person simply needs to pay the bills for 7-10 years to live a comfortable life, while the second person has to build and pay the bills to get to the same two million dollars. Not even close to comparable.
Graphically it is essentially a line chart. If you’re starting at zero, the original direction doesn’t make a big change initially. A chart with an exponential looks pretty similar to a chart with a steep vertical line for the first 5-6 iterations. Once you look out twenty iterations… the charts don’t look similar at all. One looks like it is going to a different destination entirely while the other appears to be flatlining. Does this mean you have to grow exponentially out of the blocks? No. Does it mean you have to find a way to make the curve turn up exponentially and compound? Yes.
Generally, if you’re younger it’s hard to tell which people are on the linear path versus the exponential path. To decide if it’s the correct one (without numbers) is the phone check. If you look back 10-years and are talking to the exact same people, that’s usually a bad sign. It is a bad sign since the person hasn’t moved into any new direction and the chances that the right person was found on day one is highly unlikely. Typically you have contacts you’ve known for 10 years or so… But… It’s highly unlikely you’ll talk to them frequently (a couple perhaps). Another good general rule is the skills you have to earn income. If it has been 6-8 years and there is only one way to earn money (with reasonable likelihood) this also sets up negatively for the next 10-15 years.
Decisions Compound: Take a look at every major decision that is made and they will likely compound in a big way over 10 years. Some big ones are 1) your first field of work, 2) your first location to live, 3) the amount you invest between ages 21-25 and 4) the amount of leverage you take on related to consumer goods vs. financial assets. If these four decisions are made correctly it’s almost impossible to *not* start with the “line graph” moving in the right direction. Undoing any of these four is like climbing out of an enormous hole in the ground. Instead of focusing on small decisions that might make a few extra dollars here and there (or save a few extra dollars) the fixed costs, linearity of compensation and investment percentage will determine the slope of the graph. In fact if you talk to someone who has amassed a high net worth, they can usually pin point only 3-4 events that really changed their life. Yes the grind and 100s of hours of work are a given… Yet… it consistently comes down to a few key decisions.
Financial leverage is the best explanation here. If you buy any asset on 4x leverage your gains are not made immediately (unless you get lucky or flip the asset like a fixer upper house). Generally what happens is the spread between the rate of return and the cost of paying down debt creates a value gap. If we think about this further and include inflation it means the “cost of carrying debt” goes down even if your return is just enough to cover the payments. Now we would never recommend levering up to buy an asset that doesn’t generate a return well ahead of the interest rate on the debt. Yet. Even a break even number isn’t a loss since you’re using someone else’s money to give you an asset.
Time Flies By: Another interesting thing you’ll notice is that age makes time blow by. There is no way to pin point exactly why this is, but it is likely because each year becomes a smaller percentage of the total life you’ve lived. If you are twenty years old, two years is 10% of your entire life. When you reach forty, two years is just 5% or less than half. So on and so forth. So when you look at the gains you make from age 20 to thirty from a percentage standpoint they look incredibly high and replicating this gain is quit difficult. Similarly, this begins to blur the years together. You’ll look back and say “I’ve known you for 6 years?” or “We used to think $XXX was successful”?
This brings us to a theory on trust. If you’ve lived to age 40… anyone who made it has been a close colleague/friend for about 20 years if you knew them since college (50% of your life). If you were fortunate to know someone since you were kids, that would expand the percentage to a whopping 80-90% or so. Naturally, as you get older the number of people you’re going to trust then goes down. This is an interesting way to take more risk if you’re older. A form or risk taking for someone in their 30s-40s who is looking to “level up” again should give more responsibility to younger people that they do not know as well. Feel free to take that to an extreme or less extreme.
Trying to Survive: The last one is similar to the “what used to work changes” theme. Essentially, it’s hard to blame people for making mistakes when an entire generation (10-20 years older) is pressing them to go into something that no longer works. While we could say that a 20 year old should be smart enough to to figure out these types of decisions on their own… it just isn’t as easy when you include the *amount* of pressure instilled on the younger generation. If your entire family and the school system forces you down a specific path, it isn’t easy to step back and say no particularly since you’re cutting loose a fall back plan. At the end of the day each generation is simply trying to survive so they encourage the younger generation to go down a path that gives them the highest probability chance of survival (life is difficult for the majority). Ironically, the highest probability chance of survival is rooted in un-teachable skills which conflicts directly with the advice being handed down to each new generation.
Putting the Pieces Together: One of the main reasons we recommend keeping a basic journal is seeing if your problems and life habits are changing. This was essentially the inspiration for the post. 1) if your general annual calendar isn’t changing this is a bad sign, 2) if your day to day contacts are not changing and item number 1 isn’t changing… this is a second red flag, 3) if you’re trying to squeeze more results out of the same toothpaste tube – a job/career single form of income, it’s not a smart decision, 4) the initial decisions being made today will have an exponential impact on your life 10-years later – it doesn’t matter if you’re 20, 30 or 40 years old, 5) risk isn’t just financial and while leverage is the most common one cited, who you trust with your time and where you place your time is the biggest lever you have, 6) trying to pass down advice only works if you’re up to date on the problems of the generation below you, otherwise it’s just not possible to place the same tired advice that worked 20 years ago onto someone living today and finally 7) spend a lot less time worrying about the growth being 10%, 5% or 15%… focus more on growth being positive a single negative setback or a minus 10%… can negate many years of work.
Back to normal posting focusing on money going forward, we’ll also hold our Q&A this Friday on January 18.