Why YOU are NOT the next Pat Flynn (Well…. Most Likely)

I would like to go on the record to say that I really like Pat Flynn and have been an avid reader of his Smart Passive Income Blog and listener of Smart Income Podcast. This post is to share my thoughts on Pat’s book Let Go and why it made me see Pat’s story in a slightly different light.

I must admit I didn’t know Pat’s story in great detail before reading Let Go but from what I’ve heard and read in the past I got an impression that Pat’s story went something like this. Pat is a regular everyday guy who lost the job he loved during the Housing Collapse. He decided to try online business and after some initial struggles and loads of hard work he managed to build a thriving online empire which proves that if you work really hard anyone can do it. As I was reading Let Go however I realized that this narrative is not exactly correct.

First of all, Pat is not just a regular guy. While reading the book and watching the videos it becomes very clear that Pat was a very hard worker at school and University getting involved in extra activities to advance himself. At work he also applied himself over and above through hard work and more study to become the youngest Job Captain ever in his architecture firm. Pat clearly was a high achiever through school, university and employment. I dare say that he was in top 5% at school and his job. Should it surprise us he excelled online as well? Are you in the top 5%?

The second thing that struck me is that Pat didn’t actually start from scratch. I mean he did, but not in a way I thought. I was under the impression that Pat started to build an online presence only after he lost his job. But as explained in Let Go he actually already had a very popular blog highly ranked in Google, he just didn’t realize he could make money from it. During his time at the architecture firm Pat built a blog to help him study for the LEED exam. Over time and unbeknown to Pat his blog became very popular drawing around five thousand visitors every day. This is the sort of traffic most people could only dream about and vast majority of bloggers never achieve, no matter how hard they try. From there Pat had to work very hard to write a good eBook to monetize the site but he already had the beginning of a very successful business. I do not want to diminish Pat’s achievement, but it is hard to ignore that it is much easier to monetize a site with five thousand daily visitors than to generate that sort of traffic from nothing in the first place and then monetize it. In Pat’s case it took years. In reality Pat actually did both of those things, but importantly, part one (getting the traffic) happened almost by accident as the result of a study project long before Pat was laid off from his job. I wonder if his story would’ve been the same if he had to start with no job and no online asset waiting to be monetized?

Let me be clear that I am not trying to say that Pat was somehow lucky and doesn’t deserve his success and great admiration. I think he absolutely deserves it. But if you read Pat’s story you would realize as much as I did, that Pat’s success is not a result of some Internet marketing bullshit like “believing in yourself” or “following your passion”. His success is an outcome of a very talented and hard working individual applying himself by creating a valuable resource without the initial motivation of making Internet riches, driving traffic, getting ranked in Google, selling affiliate products and so on. He first created something very good and valuable and then, and only then, he made any money from it.

Does this make Pat Flynn any less inspirational than he is? No certainly not, but those that learn his story have to draw the correct inspiration. Pat’s story is more complex than an commonly regurgitated Internet marketing narratives would lead us to believe. While there is not reason why Pat’s success cannot be emulated, his story also sheds the light on why most blogs and online ventures fail. In my experience the vast majority of the “make money online” crowd simply doesn’t have the necessary attitude, aptitude and marketable expertise to become the next Pat. Are you the top 5%? Are you the next Pat Flynn?

Book Review: Geoff Birch “Self-Made Me” – Value Capitalist Blog.

I finished Geoff Burch’s book “Self-Made Me” the last night and it took me a bit of time to make up my mind about it. To be totally honest I am in two minds about this book. I will try to explain why.

The front cover of the book boldly proclaims that “self-employment beats everyday employment” so one would think the book would be flying the flag for the budding entrepreneurs and trying to turn current wage slaves into self-employed hustlers. It sort of does… Geoff starts off by singing about the virtues and benefits of working for yourself but then he goes too far and stuffs it up.

You see, if someone is considering self-employment, they would want encouragement, reassurance and some advice to make it happen. The book does this to a point, but the author loses his way when he tries to alert the budding entrepreneurs to dangers and pitfalls of running their own business. He simply goes too far and instead of helping and encouraging he ends up putting you off.

As someone who is considering self-employment and running my own business I felt deflated after reading the book because Geoff made it all such bloody hard work. You are on your own, everybody wants to steal your clients, you will suck at most things, nobody will ever give you any work, as soon as you make a mistake it’s all over, and so on and so forth. Now, I appreciate that some people have an overly optimistic view of business, and some business ideas are a sure way to financial ruin, but you can’t write a book about the wonders of self-employment only to dedicate the majority of its content to trying to talk people out of it.

That said, all is not bad. I enjoyed Geoff’s McPlumbing mental exercise which makes you consider a plumbing business in a context of McDonald’s. How you would franchise one? What would you need? This is actually very useful as it makes you consider your business as a system and think about the actual workings of the business itself rather than some fancy romantic notion of “being your own boss”.

I also quite liked that Geoff is not keen on unique business ideas for the simple reason that if nobody is doing what you are planning to do there are normally only three reasons: you have a global hit on your hands and you are the next Steve Jobs (unlikely), there is no market for your idea, or it’s too hard or impossible to make any money. In a nutshell – new ideas are risky.

Overall the book has some excellent nuggets of wisdom but suffers from focusing too much on the negatives. Don’t get it if you after a book to inspire or lift your spirits. Get it if you are after advice for what not to do if you are planning to run your own show.

Make Money Online Without Investment – Value Capitalist Blog

The usual advice about earning money online normally centres around finding your passion or area of expertise and building a niche site, a blog or a product around it. Even though this is a good advice it still requires to invest some money upfront to purchase a domain name, pay for website hosting and so on. But what if you want make money online without investment? What if you don’t even have a dollar to spare?

Bad news is your options for making money online without investment are limited. Good news is they do exist. I can think of at least a couple of legitimate strategies that will fit the bill. Please note that I will only cover the strategies that I can personally recommend. There are plenty of get rich quick and easy scams out there but I will not cover them. All of the below strategies are fully legit:

Sell Your Stuff on eBay.

Lets face it, most of us have a lot of junk in our garages and cupboards. Chance are, if you haven’t used something for more than twelve month, you don’t need it. Putting this stuff online can quickly earn you a few dollars. Depending on how much stuff you sell your earnings can run into thousands of dollars without any upfront investment. If you want to improve your chance of selling your stuff for a good price read my previous post 5 Lessons of eBay Selling.

Pros:

Free. Easy. Most people have loads of stuff to sell. You will be able to de-clutter your life and free up space.

Cons:

You need to have stuff to sell. You need to learn how to list on eBay. You need to organise shipping which takes a physical visit to a post office.

Freelance.

Freelancing also makes making money online without investment possible by allowing you to sell your skills. Skills such as writing, data entry, academic research, programming, SEO, translating and many many others are in high demand on sites such as Freelancer and Elance. All you need to do is set up a profile and start bidding for projects on offer.

Pros: 

Work from home. Most people have marketable skills to be sold this way.

Cons:

Some skills are not marketable online, for example physical skills like woodwork, unless somebody wants you to write an ebook about woodworking.  You are selling your time for money – freelancing is no different to a job except you don’t have to go to an office. You may need to build up a portfolio of completed projects to build a track record. Buyers feel much safer about giving work to freelancers with a proven track record. This can be hard for the newbies.

Write Articles for Others.

Sites like eHow, Squidoo, EzineArticles and others allow users to write articles for them and then receive a share of advertising revenue. The articles can be written on any topic and if you do your keyword research properly you can create a steady source of passive income. The more articles you write the more money you can make without any upfront investment. I know of people who make a few hundred dollars this way every month.

Pros:

Passive income. Once written your articles can make you money over and over.

Cons:

You need to be able to write original content. If you really want to make money this way you need to learn basic SEO and do your keyword research to pick the best keywords. Unless you can rank your articles in Google you are unlikely to make a lot of money.

Paid surveys.

Some companies will pay you money or give you gift certificates to do online surveys. I must say I never tried this myself but my wife once managed to earn $100 for doing a survey about kitchens. The catch was she had to do the survey in person which required to set up a time to attend a meeting and some follow up phone calls. Fully online surveys normally pay a lot less.

Buyer beware: Some paid survey companies are scams. Please do your due diligence before you sign up. Remember, if it sounds too good to be true, it probably is.

Pros:

Very easy. No need to write, sell, or come up with any ideas. Just answer the surveys questions and cash in.

Cons:

Low earning potential. Paid online surveys normally pay from $1 – $20 per survey. Paid surveys are not the most lucrative way of making money online without investment but if you are not doing anything with your time, a few dollars here and there beats zero dollars any day.

As you can see there is a variety of ways to make money online without any investment. Selling on eBay, freelancing, writing articles and taking paid survey can supplement your income with no upfront investment of any sort. If you can think of any other legitimate ways to make money online without investment that I overlooked please write a comment below.

Call off War on Drugs

Via Tom Woods. Guatemala President calls off the War on Drugs:

“I believe western countries fail to understand the reality that countries such as Guatemala and those of Central America have to live in,” said Otto Pérez Molina in a recent interview. “There has been plenty of talk, but no effective response. I believe, ultimately, that this is due to a lack of understanding on the part of western countries.”

He continued: “There is going to be a change away from the paradigm of prohibitionism and the war against drugs, and there is going to be a process that will take us towards regulation. So I would expect a more flexible and more open position from President Obama in his second term.”

It is hard to disagree that the so-called War on Drugs has been a complete and utter failure. So far we have spent billions if not trillions of dollars trying to beat the drugs. Results? The drug use is rampant amongst the wider community from teenagers to politicians, to law enforcement officers. So far it has been a huge waste of time and money with very little to show for it. Why not simply acknowledge the failure and try something else?

5 Lessons of eBay Selling

Hey, do you have a house and a garage full of stuff? If so, chances are you don’t need all of it. So, if you are looking for a way to make some quick cash, why not sell it on eBay?

eBay is a fantastic platform for getting unwanted stuff out of your garage and for putting some quick cash in your pocket. But like any tool there are ways of using eBay to get the most out of your stuff to make more cash.

For example, I recently sold a cover for Samsung Galaxy Tab 10.1 that was thrown in as a sweeter with the Galaxy purchase deal. I didn’t really like the cover and because it was brand new, I though it would be a hot little item to sell on eBay. I didn’t think much about how I was going to go about selling it and put in a bare minimum of effort into listing. You know how it is… A couple of quick photos, a two line item description and 7 day auction. Well, after the auction has ended and I paid for postage. I ended up with $4 in pocket. On an item that at the time retailed  for 50 bucks! Sucks, right?

So, what went wrong? I recently came across an excellent post on Ramit Sethi’s “I Will Teach You To Be Rich” blog that sheds some light on the tips and tricks of eBay selling. The post author actually interviewed Jim Griffith, the dean of eBay University who teaches thousands of people how to use eBay as a platform to build their businesses, and has been an expert seller since eBay got started.

Without boring you too much, here are the main 5 take away points:

1. Use loads of high quality pictures. The more pictures you use and the better quality they are, the more credible you will look and the more confident the buyer will be.

2. Use good descriptions. Sounds simple but many sellers (myself included) are lazy and only do a slap dash two or three line description. To get a good description look up a similar item for sale or get the description from the manufacturer’s website.

3. Research your item. Do a Google search. Look at other eBay sellers offering similar things for sale. This will give you an idea of the price and what conditions other sellers are offering (i.e. free postage). You will also learn whether people actually buy what you are trying to sell and whether it is worth your efforts to list.

4. Use a 10 day listing starting on Thursday. This gives potential buyers to weekends to notice your wares as weekends usually have higher traffic.

5. Deliver ASAP! This is very important is you want to build good seller rating.

Bonus tip – you can make money on eBay by finding cheap stuff locally that you can buy either wholesale or on major sale. Have a look at yard sales or Sunday markets.

All of the tips above are common sense but it is surprising how many people use the “list and hope for the best” strategy when it comes to eBay. Well, my dear Capitalist, the rest is up to you now. Have a look through the junk in your cupboards or in your garage and start selling!

Book Review – Personal MBA

Disclaimer: Readers beware! This book may stop you from taking an MBA course and save you from getting a huge student loan! If you are determined to saddle yourself with a six figure student loan to get an MBA degree that may not even get you your dream job, stop reading now! 

I am currently reading the “Personal MBA” by Josh Kaufman and couldn’t recommend the book highly enough to anyone considering an MBA course or if you are just interested in broadening your business education.

The book is a wealth of business information and is refreshingly free of academic jargon and impenetrable tables and formulas. Josh gives a no-nonsense advice on every aspect of starting a business, marketing a business, selling products and working with people and systems. The real value of this book is in telling you exactly what a business is and gives you are theoretical framework to cover every aspect of business operations.

I really enjoyed the section on working with ourselves where Josh gives a lot of tips and tricks on maximizing our personal productivity and avoiding stress, burnout and lack of motivation. This section itself is worth the price of the book and is relevant to a much broader audience than those looking to start their own business.

Finally I was especially impressed with quotations from Mises and Josh’s Austrian explanation of the causes of the Global Financial Crisis. The Austrian perspective can be upsetting for many traditional MBA types and I give Josh full credit for being brave enough to put it forward.

Check out Josh’s website Personal MBA

Value Investing – Part 1 – Finding Great Companies

So, you are down with all this value investing stuff. You studied the theory and want to give it a go. The value investment philosophy is very easy to understand – find great companies with bright prospects for the future, work out their share valuation (intrinsic value) and then buy them at a good discount to your valuation. Once the share price reaches or exceeds the intrinsic value sell and take profits.

Sounds simple, doesn’t it? Except it isn’t. How do you find a great company? How do you value it? When do you buy? When should you sell?

This is a huge topic to address in just one post. In this post I will show you how to identify great companies to invest in.

Great businesses we will be looking for will have the following characteristics:

• great long term prospects
• some form of competitive advantage
• high rate of return on equity (ROE)
• little or no debt
• good cash flow
• great management

The fist two are easy – we want to find businesses that have an advantage over the competition and great long-term growth prospects. For example, Microsoft has the world’s most popular Operating System platform. Apple makes the most innovative an desirable smart phones and tablets. Coca-Cola has a secret recipe and owns the World’s most recognised brand name. These are the most obvious examples that we can all relate to but there are plenty of other companies that lead their market niches that display the same characteristics as these household name giants.

High ROE. The topic of ROE deserves a post of its own to illustrate why ROE is so important and why Warren Buffett considers ROE to be the most important factor to look for. I will not bore you with technicalities but let’s just accept as a given that when choosing between two similar businesses, the business with higher ROE is preferable because it is more likely to generate surplus funds that can be invests in improving the business without the need to raise capital and increase debt. Look for companies with sustained ROE of more than 20%.

Next factor the value investor needs to look for is little or no debt. Let’s just get one thing straight. Debt is bad! But sure you will say, sometimes we need to borrow to grow and invest. Sure, debt can be necessary evil sometimes but it needs to be paid off as soon as possible. Many a good companies have been ruined by excessive borrowing. Debt is even more dangerous because it serves as a multiplier. In good times debt can enable high growth with seemingly no downside. But when business conditions deteriorate the business is all over sudden hit with a double burden of bad economy as well as servicing a large debt. There is also a risk of creditors panicking and pulling the pin just when you can least afford it.

They say “cash is king” and it is certainly true in any business. A company with strong cash flow can use excess cash flow to pay dividends or to grow their business while avoiding the perils of debt.

Great Management. Obviously, if you have a great car (a sound business) and a great driver (good management) you are going to win a lot of races. But beware, a good driver cannot win in a broken car. If the business fundamentals are poor, a good manager is not likely to save it. It is all too common to see a desperate business trying to bring a star CEO to turn things around. But beware, because as one of my friends says “one cannot turn shit into strawberry jam” even if you hire the World’s best chef.

Stay tuned for part 2 where we will look at business valuation techniques.

Montgomery Recipe for 2013

Australian value investor Roger Montgomery has an interesting post on Australian Stock Exchange (ASX) website which includes a list of top holding of Roger’s “Montgomery Fund”.

True to the value investment philosophy Roger is not trying to predict the market direction in 2013 or pick a hot sector to be in. Instead he concentrates on finding quality companies to be purchased at a discount. This is required reading for all value investors:

As we approach 2013, we will start to see opinion coalesce around the prospects for the market over the coming 12 months, and a range of market commentators will offer views on where they think the index may stand at year’s end.

I can’t say with any confidence what the market will do over the next year, and I expect that the number of people who can is getting smaller and certainly smaller than the number of opinions published. However, I do have a perspective on the longer-term merits of the Australian market. 

What I can say with some confidence is that in the long run, markets follow value. That is, if you invest at a time when valuations are broadly favourable, you can reasonably expect a tailwind. If you invest when valuations are stretched, you will face some headwinds.

The recipe is simple: The higher the price you pay, the lower your returns.

Continue reading.

Did The Rich Really Pay Higher Taxes In The 50′s

Peter Schiff’s excellent op-ed in the Wall Street Journal explodes the myth that “The Rich” paid higher taxes in the 1950′s than they do now. As Schiff explains, that while the top marginal rate in the 1950′s was indeed very high, as high as 91%, the share of income paid by the wealthy was essentially the same as it is now.

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? Two factors are responsible. Lower- and middle-income workers now bear a significantly lighter burden than in the past. And the confiscatory top marginal rates of the 1950s were essentially symbolic—very few actually paid them. In reality the vast majority of top earners faced lower effective rates than they do today.

Schiff also points out that in the 1950′s lower and middle-class income people paid higher taxes than they do now. This is something Obama administrations prefers not to talk about choosing to focus on the “Soak the Rich” mantra.

… the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s.

The changes came about not so much by movements in rates but by the addition of tax credits for the poor and the elimination of exemptions for the wealthy. In 1958, even the lowest-tier filers, which included everyone making up to $5,000 annually, were subjected to an effective 20% rate. Today, almost half of all tax filers have no income-tax liability whatsoever, and many “taxpayers” actually get a net refund from the government. Those nostalgic for 1950s-era “tax fairness” should bear this in mind.

So how is it possible that while the rich were taxed as high as 91% they actually paid similar or lower taxes? Well, if you are rich enough to earn so much money, you are smart enough to figure that paying 91 cents of every dollar you earn to Uncle Sam is a pretty bad idea. You can also pay for the best legal and financial advice money can buy and figure out a way to avoid paying:

The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy—including doctors, lawyers, business owners and executives—were versed in the art of creating losses to lower their tax exposure.

For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss.

It’s hard to determine how much otherwise taxable income disappeared through tax shelters in the 1950s. As a result, direct comparisons between the 1950s and now are difficult. However, it is worth noting that from 1958 to 2010, the taxes paid by the top 3% of earners, as a percentage of total personal income (which can’t be reduced by shelters), increased to 3.96% from 2.72%, while the percentage paid by the bottom two-thirds of filers fell to 0.51% in 2010 from 2.7%. This starker division of relative tax burdens can be explained by the inability of upper-income groups to shelter income.

It is a testament to the shallow nature of the national economic conversation that higher tax rates can be justified by reference to a fantasy—a 91% marginal rate that hardly any top earners paid.

In reality, tax policies that diminish the incentives and capacities of innovators, business owners and investors will not spur economic improvement. Such policies will, however, satisfy the instincts of those who want to “stick it to the rich.” Never mind that the rich have already been stuck fairly well.

What is Value Investing?

Value investing is a relatively simple strategy for selecting stocks (I also believe that value investing philosophy can be applied to other asset classes, but more on that later) that trade under their estimated intrinsic value. Value investors look for stocks that are for whatever reason currently undervalued. For example, a value investor would seek a stock that has estimated intrinsic value of $1 and would try to buy it for 70 cents, or a 30% discount. This discount is called a Margin of Safety.

The Margin of Safety is one of the most important concepts in value investing. Stock valuations are always  based on incomplete information because investors cannot always know or predict everything about every stock. Different investors use varying assumptions about the future market outlook and use different valuations methods. Because valuations vary, the future is uncertain and investor’s assumptions can be wrong, a value investor will always seek to buy stocks at large discounts to allow room for error. This discount is known as Margin of Safety.

Once stocks are purchased at a discount to intrinsic value, the value investor will wait for the stock prices to appreciate to reflect the true value of the stock.

If all of this sounds complicated there are other ways to use value investing philosophies to make money in stocks and even real estate. I know this will sounds like heresy to all the hardcore Buffettistas out there but here we go.

I believe it is possible to use value investment philosophy to make profits without having to learn about individual stock valuations and learning all there is to know about every stock. Occasionally the stock markets put on huge For Sale signs across the board. I can remember a few of these opportunities during my lifetime –  the 97 Asian Financial Crisis, 2008 Global Financial Crisis and Tsunami in Japan all resulted in huge tumbles in stock prices followed by strong recoveries. During such times investors could purchased a broad based index fund and make very good profits without having to value individual stocks. As Warren Buffett puts it “Be fearful when others are greedy and greedy when others are fearful”.

This is by no means pure value investing and a good value investor would always achieve much better results by selecting a narrow portfolio of quality stock trading at large discounts to intrinsic value. That said, I can still guarantee that the above approach will yield much better results that the common “follow the herd” approach followed by most stock market investors.

Can value investment philosophy be applied to other asset classes? I believe so. For example, many property investors buy negatively geared property  based on the idea that property prices always go up and in the long run they will always make money even if they lose money in the short term. Other investors such as Australian Steve McKnight look for for positively geared property in undervalued areas, undervalued property that can be improved or for when special circumstances, such as after the US Housing Collapse, present themselves. Using this approach Steve managed to build a substantial real estate empire when most property investors only own one or two properties.

Commodity investors such as Jim Rogers also use value investment philosophies by looking at long-term commodity trends to find commodities that sell at large discounts to their historical values such as silver, gold or agricultural land.

I would like to stress once again for fear of upsetting hard core disciples of Buffett and Graham that these approaches are not pure value investing but they do use investing philosophies by seeking  undervalued assets or special market conditions to purchase stocks, commodities or property at substantial discounts. Just remember that the higher the discount, the higher the potential upside.