Getting to the Next Level
September 19, 2007

I am staying in a beautiful, 28-bedroom chateau in Normandy, France, leading a yearly meeting for my largest client, an international publishing company. There are about 40 attendees gathered here from the United States, England, France, South Africa, Australia, Spain, Ireland and India. The purpose of the meeting is talk about how each publishing group can "get to the next level."

This theme is based on an idea I worked up for the book I've just finished writing - one that will be published in January by John Wiley. It will be called Ready...Fire...Aim: Zero to $100 Million in No Time Flat.

The book is about how to start and grow an entrepreneurial business. It contains most of the most important lessons I've learned in my 30+ year career. The theme of the conference - getting to the next level - refers to of an idea I presented in the book: that there are basically four stages of growth for entrepreneurial companies: infancy, childhood, adolescence and adulthood.

For convenience, I distinguished these stages according to revenues. Thus:

Stage One Infancy Zero to $1 million
Stage Two Childhood $1 million to $10 million
Stage Three Adolescence $10 million to $50 million
Stage Four Adulthood $50 million plus

Each of these stages has its own unique problems, challenges and opportunities. The big problem when you are starting a business, for example, is that you have a limited amount of time and money. The challenge is finding a cost-efficient way to bring in new customers before that time and money run out. And the opportunity is the chance of developing a company that will give you a good income and increasing wealth for as long as you own it.

Each stage of grow also presents the entrepreneur with the chance to develop an important set of skills that will be invaluable to him for the rest of his business-building career. The skills that you must learn to get a business from infancy to childhood, for example, are all related to sales and marketing. It takes most entrepreneurs several thousand hours of experimentation and failure to learn those skills, but once they are acquired they are always immensely useful.

At the beginning of this conference I explained this concept to the 40 publishers assembled. I outlined each of the four stages and described the typical problems, challenges, opportunities and skills that are associated with each. I also explained that each of them ran businesses that were, in themselves, conglomerations of smaller businesses. "To fully understand how to get your business to the next level," I told them, "you have to understand how exactly your business fits into the chart."

I'd made this presentation once before - at the entrepreneur's retreat that I conducted last spring in Manalapan. The business owners that attended that retreat found it to be a very helpful tool. I wondered whether these publishers would too.

They did. The seminar started out tentatively because the structure was new but ended up very strongly with most people providing specific reasons why they found it useful and what specific actions they were going to take to improve sales and profitability over the coming year. I felt very good hearing how much these 40 sophisticated people had absorbed. Based on the several hundred specific action items I heard recited this afternoon, it's hard to believe that this company won't have a considerable increase in value in the coming year.

This is a very useful practice for every business owner. Figure out what stage of growth the business is, what its major problem, challenge and opportunity is and what skills the business owner must acquire to solve the problem and meet the challenge.

There were lots of other great ideas that came out of this seminar - and I’ll talk about them in future blogs - but this exercise is so helpful that it merits its own discussion. So, once again:

  1. What is the major problem or obstacle that is keeping your business from getting to the next level of sales?
    a. Is your marketing ineffective?
    b. Do you have trouble creating new products?
    c. Is there too much chaos in the organization?
    d. What other bottlenecks are there?
  2. What is the most important growth challenge you currently face?
  3. If you met that challenge, what benefit would your company enjoy?
  4. To accomplish that objective, what skills do you need?

Read more!

posted by M. Masterson @ 8:47 AM, ,




What I'm Doing with my Money Now
September 7, 2007

I'm not much of an investor. I am very conservative with stocks and bonds. I don't trade. And I don't leverage my investments except for real estate and only then with conventional mortgages.

My policy is buy quality at good prices and hold for the long term. That's an easy policy to maintain when your income is high and your nest egg is large enough to last. Most people don't have that luxury. They have heard the Warren Buffet story ad nauseum. But they don't feel like they can achieve their financial goals by investing in quality and holding. They want bigger profits, faster.

When I was in that position, I toyed with the idea of getting rich from stock investing but I had the fortune of working for a guy who knew a great deal about stock investing. My boss at that time, JN, had been a major player in the stock market in the late sixties and seventies. In fact, he had been the youngest person in the history of Wall Street at that time to have a seat on the exchange. He made millions in the stock market - but as a businessman, not as an investor. When the market tanked he got out and went into the travel business and made a fortune there. And when that industry faded he started a newsletter publishing business and that is how I came to work for him - as the editor of his publications.

About a year after I began working for him we decided to get into the financial newsletter publishing sector. In researching the industry, I was exposed for the first time to all the wonderful stories about people getting rich by investing in stocks.

I remember once talking to him excitedly about it. "You are a stock expert," I told him. "So why don't we use some of our cash flow to buy stocks and get rich fast instead of waiting years to build up these newsletters?"

The answer he gave me at first puzzled me and then changed the way I have thought about stocks ever since. He said, "Let me tell you something about making money, kid. You make money by selling things, not by buying them."

As I said, at first I didn't even know what he meant so I asked him a few very dumb questions. "Look. I made a ton of money on Wall Street. More money in a few short years than I expected to make in a lifetime. But I didn't make that money by investing in stocks. I made it by selling other people stock investments."

"We are not in the business of selling stocks," he went on to say. "We are in the business of selling newsletters. Focus your attention on doing that well and you'll have plenty of money for investing in stocks, if that's what you want to do. But your opportunity to get rich now lies in selling newsletters. Don't forget that."

I had enough sense to listen to his advice and our business grew quickly, from $100,000 in revenues to $135 million in 11 years. The business itself changed and expanded several times from selling publications to selling merchandise and finally to selling contests and sweepstakes.

For the first few years we reinvested every dollar we made in new businesses and that was the best way we could have invested it since we were seeing 505 to 100% growth year after year and seeing ROIs that were simply astronomical. Eventually the cash flow was larger than we needed - even with our aggressive expansion plans - and so we were forced, for the first time, to decide where to put that extra money.

We bought into a few start-up businesses that were outside of our field of knowledge and lost all our money on every one of those. We invested in rare coins and gold and stocks and did about as well as anyone else was doing - which is to say, not very well.

When I realized that JN was doing no better than I was, despite his superior knowledge and expertise, I decided I would drop the idea that I could outsmart the financial markets. I accepted the idea of long-term, fundamental investing and decided that I would invest my money in three ways only:

1. I'd put most of my money into start-up businesses in industries I knew so long as I had a reliable and competent partner to run them.
2. I'd invest half of what was left over in quality real estate deals - first by buying a more expensive house and then by buying undervalued properties and improving them and either renting or selling them, depending on the market. I did the first one myself and then, realizing that these had to be managed carefully, did the rest with partners.
3. The other half of what was left over would be invested in quality stocks and bonds at a 50/50 ratio.


I knew I wouldn't be successful with every business I invested in, but I also knew that I didn't need a perfect track record to succeed. If even one out of five succeeded, I could get rich because with a start-up business you have two things you don't have with a passive investment in a stock. You have intimate knowledge of the business and the industry. And you have power to change what the business is doing, if you don't like it.

Since I happened to be employed in the publishing business at the time, I figured my best chance of entrepreneurial success would be to start little publishing businesses. I started some with JN and I started others with friends and family members.

Since I was working 60 hours a week on my main job, I knew I couldn't run those start-up ventures. So I made it a point to partner with people I could trust to manage them honestly and intelligently. I kicked in all or most of the capital and provided advice on a weekly or monthly basis (more frequently in the beginning and less frequently as the business matured) and my partners would run the day-to-day operations.

It was a formula that worked very well. There were some mistakes (getting into industry sectors we knew too little about) and some disappointments (partners who overvalued their importance simply because they were managing the business) but generally speaking the formula worked very well.

Over a twenty year period I started dozens of businesses this way and most of them worked. Some were sold to outsiders. Some I sold to my partners. And some I kept. Today, besides my primary business which is substantial and takes up most of my working time, I have about a dozen streams of income from past ventures that I've kept. Some of these bring five or ten thousand extra dollars a month. Some are much bigger.

I liked real estate next best because I felt like I could understand it pretty well. Buying and selling fixer-uppers was a very simple business. And rental real estate, though more complicated, can be learned pretty quickly too. The only part of real estate that is at all tricky is predicting the market. But by sticking to local neighborhoods that I knew and making very conservative projections when I was figuring out whether a particular deal made sense, I felt like I couldn't go far wrong.

And I didn't. I started investing in real estate in earnest around 1985. In the 20 years that followed I developed a very substantial international real estate portfolio. If all my other investments disappeared over night, my real estate holdings would be more than I need.

Amateur market historians will note that my timing as a real estate investor could not have been better. I went into the market just after a real estate recession in South Florida had ended and enjoyed one of the best long-term rides in modern financial history.

My initial stock market investments were in individual stocks recommended by full-service brokers who put me into all sorts of companies I knew nothing about and told me all sorts of good stories when the stocks failed to achieve their lofty projections. I also bought a lot of life insurance during this period of time. The guy that sold those policies to me was very likeable and completely impossible to understand. When my life insurance investments failed to do what they were supposed to do, his explanations were completely incomprehensible.

For a while I blamed myself for doing so poorly with equities. But then gradually I realized the full truth of JN's early advice to me: If the secret to getting rich was selling things, then who was getting rich on all these stocks I was buying? Me? Or my brokers?

In the early 1990s I cut bait with my insurance broker and all but one of my stock brokers (one guy had kept me in conservative blue chips and hadn't churned the account and, as a consequence, had left me with a return that was about equal to the market) and started investing in no-load index funds and high quality municipal bonds.

And that's all I've done since then and have been happy with the average returns I've been getting. But two years ago I got out of the real estate market (except for one investment I made in another part of the country with Justin ford) and I am worried about the stock market.

The two are closely related.

What's Going on With Real Estate, anyway?

Generally speaking, real estate is a local business. The truth of this axiom was demonstrated during the months of June and July. Nationwide, sales of existing homes fell to a seasonally adjusted rate of 5.75 million in July, which was almost 10% lower than last year and lower than it has been in five years. And yet home sales in the West and Northeast rose during the same period and stayed flat in the South.

Home prices in the Northeast were particularly strong. According to the National Association of Realtors, they rose almost 6% compared with a year ago. "That was the first region to undergo weakness," an NAR spokesman said, "and they are climbing out of it now."

That's one point of view. Mine is that home sales will continue to fall for at least another 9 months -- which is about the size of the supply of single-family homes right now - and possibly longer. I also think that as nationwide sales keep falling, prices in the Northeast, West and South will fall with them.

These most recent figures don't reflect all the fallout that took place in the mortgage markets during August. And from what my banking friends tell me, the trouble that's been reported in the press so far is just the tip of the iceberg.

I am writing this in the airport. The lady next to me is on the cell phone telling her friend that her firm, apparently a large lending company, has just fired 2500 employees.

My personal holdings in Florida have gone down. I'm not sure how much, but they are definitely down. And my employees that own homes are being squeezed by rising property taxes, mortgage rates and flood insurance premiums. I know at least a half dozen people who have recently defaulted or are planning to default on their mortgages.

DR, the guy who fixes our computers at ETR, is a typical example. He came to me with a proposition. He had invested $18,000 in a brand new, $270,000 1800-square-foot house that he intended to flip for a profit. Now that prices have softened he figured he would rent it. But the cost of his mortgage, property insurance, maintenance and taxes will amount to about $3000 a month. The most he could get for rent would be about $1500. That would leave him with an $18,000 a year deficit. He wanted to know if I thought that the property would appreciate that much in the next few years. I told him no. and then he wanted to know if there was some way I could put some cash in the deal and bail him out. As a favor to him, I spent an hour trying to figure something out. I was happy to get only 5% on my money - which is what I get at my bank right now - but even at 5% the deal couldn't fly. DR bought this property at $150 per square foot, which is a pretty good price for this area. Yet he can't sell it at that price. And if he can't, there are hundreds more in his situation.

All that said, Justin Ford is making good money investing in real estate in specific areas of the country. He just sent my sister a check that almost doubled her money in less than a year. And AS got $48,000 back in 11 months on a $30,000 investment. Those are very good ROIs. I've just put about a hundred grand with him and am considering a larger investment. In making real estate investments Justin sticks to the fundamentals: he buys undervalued properties in growth regions. And he makes sure that he can at least cover his operating costs with rent if the market turns against him.

And What About the Stock Market?

I'm getting the feeling that we are going into a recession. I could easily be wrong. I am not an economist and have no experience making economic predictions. But you don't need to be a professional forecaster to recognize that things look pretty bad right now. The stock market is being choked by a major credit crunch. The financial industry is in turmoil with thousands of brokers and bankers losing their jobs. The mortgage industry is crumbling from the inside out. And consumers are feeling poorer. And why shouldn't they feel that way? They are poorer.

When the stock market tumbled in 2000, I didn't feel especially concerned because the housing market was still appreciating and because all the entrepreneurs I knew were still doing good business. Today, business is still pretty good for the small businesses I know, but business owners are worried, like I am, and are canceling plans to expand or bring out new product lines.

This retrenchment, if its typical, will slow the growth sensitive side of the economy which is the sector that needs to be strong and expanding if there is any hope of working our way out of the mess that the larger businesses and banks have got us into.

Those are some of the reasons why I am pessimistic about the economy. And because I felt that way I'm going to prepare for the worst while I hope for the best.

Preparing for the worst means survival planning. For each of the three types of investments I have, I will create a survival plan.

1. Entrepreneurial Investments: For the business I own or run, I'm going to create a short business plan that will describe how the business can operate profitably if sales drop considerably - say 20% to 50%. I'm not going to scare my employees by showing them the plan. Since I am operating on a hunch, there is good reason to hope that I'll be wrong and so there's no point in upsetting people. But I will scrutinize the plan with the CEO and CFO to make sure that it is realistic and can be put into effect relatively quickly. Because if sales collapse, they will likely collapse suddenly. Slipping quickly into a leaner, meaner infrastructure is essential for survival.
2. Real Estate: Most of the rental property I own was bought more than five years ago and so is producing a positive cash flow, even given today's higher prices and lower rental roles. I have just two properties that I stupidly agreed to buy early last year that don't cash flow. I don't want to sell them now. So I've paid down the mortgages and have allowed two key employees to live in them at rents that are below market. My partners and I have drastically changed the real estate developments I'm invovled in, cutting costs to the bone so that we can survive what I expect to be a two- to seven-year recovery period. And I've socked away some cash to start buying property when the great deals start comig in. That should be soon - maybe as early as January.
3. Stocks and Bonds: I continue to buy tax-free bonds as I always have and will continue for another six months or a year - however long it takes me to reach a target I set when I started investing in bonds. That target was a number big enough so that the yield I'm getting, if I took it, would be more than enough to pay for my current lifestyle. (My safe-harbor strategy is to have three primary streams of income - one from active busiensses, another from rental real estate and a third from stocks and bonds, each of which is more than sufficient. That way I'm triply assured against disaster.) As for stocks, I think I'm going to get out of them for a while and go back in after the real estate crisis is resolved - either by inflation or recession or both.
4. Other Investments: I bought a bunch of gold - bullion coins - about three years ago. They give me some protection against the dollar's decline. And I own some overseas businsses. So there's that. I own fine art too but I don't think this will do well in the near future because the market has been supported by multimillionaires and billionaires who made their money from leveraged buyouts and real estate. With these industries collapsing, art will probably take a dive too. It's probably too late to sell art now. In any case, I have it because I like it. Will I trade currencies or commodities? No. But not because it isn't an opportunity. It probably is. I just don't have time to learn about those things. One good thing: I can get 5% on my cash now. That's not enough to get rich fast, but it might - along with everything else I'm doing - help me maintain the value I currently have.

That's how I see it from here. But like I said at the beginning of this, I have no expertise in investing. So don't write me to tell me that. I already know it.

You have to figure out your own strategy: given today's economy and market outlook, how are you going to maintain the value of your current investments and - if possible - create additional wealth in the future?

Read more!

posted by M. Masterson @ 11:24 AM, ,




Bound Treasures
September 4, 2007

I've been a collector of books for as long as I can remember. Every place I have ever lived in, from the first basement apartment to the two large houses I own today, has been filled with books. Books to me are little treasures: ink and paper treasure chests that can give what life never gives enough of: pleasure and power. Pleasure from the beauty. Power from the knowledge.

It is not unusual for someone coming into my house or office for the first time to look at all the books and say, "You've read all of these?"

Why would they think that? Why surround yourself with books you've already read? Having a library of read books is like having a bank vault filled with empty money bags.

My library is 90% unread books or read books I intend to read again. Books I'm done with are given away or tossed in the garbage. I don't have space enough for them. New books are always coming in. Space is limited.

A library is meant to be a bank, not a mauseleum. Its contents represent what is possible in the future, not what has happened in the past. Every library should have some great books, some Shakespeare and Austen and Bukowski. And every book lover should make an effort to read a great book now and then. Life is too short for too many bad ones.

There are two ways that a book will find its way into my library:
1. A laudatory book review by a smart reader or
2. A good binding and cover and title.

When I read a book that has been intelligently recommended I read it with good intention. I want to get from it what the critic did and maybe something more. Oftentimes I feel like I do. But just as often I am disappointed.

If my batting average is 500 with recommended books, it is much worse with books I've selected because of the cover. There is clearly no connection between the skill it takes to name and decorate a book (which is the publisher's skill) and the skill it takes to write one. Still, I persist in bringing home these little volumes of found art. Because when I am right, the pleasure is especially sweet.

I had that pleasure this week. Looking for a reference in the bookshelf behind my office credenza I came across a medium-sized book titled Conversation: A History of a Declining Art. I pulled it out and studied it for a while. I had no idea where it came from but judging from how much I liked the look of it: its size and thickness, the quality of the cover stock, the font used for the title and the image (a hand colored print of parakeets), I figured I must have judged this book by its cover.

What did I expect from it? It's hard to know. Some pleasure in the writing, in the practiced prose of an intelligent author. Some memorable details about conversation's history, some facts or figures I could use later on in my own conversations. I probably hoped too to understand what was meant by conversation. How is it different from talking, for example?

I was on my way to Las Vegas to root for one of my Jiu Jitsu trainers, who was fighting the undercard in the UFC. I threw the book in my briefcase, thinking there would be little chance I could get to it, since I had plenty of writing to do on the plane. But I picked the book up during takeoff and didn't put it down until the plane landed. I had finished the 330-page book in the time it took to fly from Fort Lauderdale to Las Vegas. And it was a very good book! I walked off the plane with a very good feeling.

To be completely honest, my hope for great prose styling was not realized. The author, Stephan Miller, was not as skillful a wordsmith as I had hoped, but he knew his subject and he filled his book with interesting facts and figures. And his big idea - that cultured conversation was necessary for a democratic government - surprised me.

Like the writers Miller criticized in his book, I'd always thought of cultured conversation as frivolous, something effete intellectuals did while sipping Port smoking tiparillos. In fact, Miller argued, conversation is the highest and most useful sort of communication. When done well and properly it makes otherwise mediocre people better.

I'm eager to think about this some more and to find some way to work it into my writing. The entire history of the thinking world, Miller has convinced me, can be looked at as a debate between those who loved in conversation and those who feared it.

You wouldn't think that reading a pretty book on the history of conversation would have much relevance today, but it does. Spend a moment and think about how the current political world is broken in two this way: with George Bush and Islamic terrorists and Christian fundamentalists on one side and Ron Paul and the ACLU and half of Hollywood on the other.

But that's the essay yet to be written. This one is about collecting books and reading books and letting them make your life richer and stronger. What books linger in your house or office, waiting to be read? What pleasures have you deferred? What power?

Don't tell me you "don't have time to read." Don't say, "I do all the reading I want to at the office." Don't argue that you are an "action person" or dyslexic or depressed. There are no good reasons not to read. And no future wealth for you if you don't have a personal library.

Read more!

posted by M. Masterson @ 3:47 PM, ,