When I first started making more money than I was spending, I asked my partner to recommend someone to help me do my taxes. “You should speak to Sid,” he told me. He does my taxes and he’s good. Plus, he got rich as an accountant, and that’s not easy to do.”

Sid was his father-in-law. He must have been in his 60s back then, in the early ‘80s, but he looked older. He was tall and gaunt with an angular face and thin gray hair. He was shocked when he discovered how little I knew about money.

Perhaps for that reason he adopted an avuncular attitude towards me. He advised me on taxes, but that was just the beginning. He quizzed and lectured me on sales and marketing and business communication. And he advised me on investing, too.

“Why are you spending all that money on art?” he would exclaim. “It’s just decoration! Just pictures on the wall!”

He failed to dissuade me from collecting art, but he was a big influence in helping me develop a philosophy of wealth building. “You’re making good money now, kid,” he said after I received my first big dividend. “But if you’re not smart, you can lose that much and more with a single stupid move.”

Sid had been a very aggressive businessman (as was his son-in-law). But when it came to investing, he was a conservative as one can be. He bought for himself and recommended to me only two asset classes: triple-A municipal bonds and Treasury bonds.

“What about stocks?” I frequently asked him.

“Stocks are for shmendriks and schmucks,” he’d howl. “Bonds! Buy bonds!”

The Corona Economy, Part IV

War, Debt, and the Eve of Destruction 

“I found this national debt, doubled, wrapped in a big bow waiting for me as I stepped into the Oval Office.” – Barack Obama

In Part I of this series, we looked at our government’s financial situation the way an investor would look at the financials of a business. The conclusion: From a P&L and balance-sheet perspective, it looks awful.

In Part II, we saw how much worse those financials are going to be at the end of this year: a bigger deficit (by $6+ trillion), a smaller GDP (by about 20%), a much larger debt (around $30 trillion).

In Part III, we rued the fact that these facts are not understood by 98% of the voting public, and are misunderstood and/or ignored by 80+% of our elected officials and the media that report on what they’re doing.

And in case you’d want to be one of the 2% of the population that does have at least a basic understanding of how money works at that level, we provided an introduction to US fiscal and monetary policies (as we understand them). Today, we continue where we left off.

The Idiot’s Guide to Monetary and Fiscal Policy in the US (continued)… 

When our government spends more money than it takes in, it covers the difference (the deficit) by borrowing money. It does that through its Treasury, which sells bonds (government IOUs) for the dollars it needs for its overspending.

Treasury bonds are attractive to savers and investors for two good reasons. (1) They are generally considered risk-free because they are “backed by the full faith and credit of the US government. And (2) as “fixed-income securities,” they provide the investor (bond buyer) a guaranteed return paid out on a predetermined basis.

Guaranteed returns by the world’s largest and “strongest” economy? Of course there will be a big demand for T-bonds. Individuals want them. Banks want them.  Pension funds want them. Even foreign countries want them. Not necessarily as a primary investment, but as an asset they can count on when everything else is in flux.

Whether the bond buyer is a retired plumber or a sovereign nation, Treasury bonds promise a solid foundation for any portfolio, providing a sense of security that’s the next best thing to gold. Think about it. Holding T-bonds is like owning a share of America! So long as America doesn’t declare bankruptcy, those IOUs will pay off.

A Wee Bit of History 

The history of US debt is the history of its wars. Before the Civil War, the national debt was relatively modest, because before then there was no income tax. Wars were funded with sales taxes and the like.

The Civil War changed that. Between 1860 and 1866, the debt rose from $64.8 million to more than $2.7 billion, approximately $42 billion by today’s standards. To keep the nation whole, President Abraham Lincoln pushed debt to nearly 30% of gross domestic product and introduced the first income tax in American history.

After that, every war led to ever-higher debt levels. WWI elevated the national tolerance for federal debt, bringing it to $27 billion. More importantly, Woodrow Wilson changed the way debt was approved. Congress’s previous approach was to approve each bond sale individually. Wilson introduced the “debt ceiling,” whereby the US Treasury was told how much it could borrow overall and the administration was allowed to manage the sale of individual rounds of debt. This law has remained in place ever since.

President Franklin Roosevelt made a big “contribution” to raising our debt through the New Deal, elevating borrowing to over $40 billion to fight the war against the Great Depression — nearly doubling the national debt when he took office.

WWII was the next big step in the history of US debt, with the government spending more than $323 billion ($5.8 trillion in today’s money) to defeat Germany and Japan. Much of that money was borrowed. And between 1940 and 1946, US debt climbed from $42 billion to $269 billion, much of it held by individual Americans in the form of Treasury bonds.

But between 1965 and 1978, two more “wars” dramatically boosted the national debt. One of them, from 1965 to 1975, was the Vietnam War. The other one began in 1966 when Lyndon Johnson signed the Medicare program into law. Like the Vietnam War, it was a battle we would not win. But unlike the Vietnam War, the costs of fighting it have never ended or even diminished.

Since then, the national debt has not stopped growing. It grew under President Reagan and under George H.W. Bush and Bill Clinton. (Although the rate of growth slowed considerably after Clinton got Congress to enact tax increases early in his first term.) In the year 2000, our government went into the new millennium with a debt of $5.65 trillion.

Debt slowed a bit in the 1980s and 1990s. Then, on Sept. 11, 2001, President George Bush Jr. spearheaded yet another war – the war on terror. But the invasions of Afghanistan and Iraq were not funded by additional taxes. They were funded by debt, growing at a rate of $400 billion to $500 billion per year.

The Great Recession of 2008 brought deficits beyond the $1 trillion mark. And under Obama, that continued, although it did diminish by more than half during the second half of his presidency.

Then, in 2018, Donald Trump was elected president. Many hoped he would reduce spending, but that didn’t happen. Instead, he oversaw a deficit increase to $1.3 trillion during his first full year in office.

And now we have the war on COVID-19.

Bartering for Dollars 

All of these wars since the Civil War have been funded by government debt. Initially, it was private citizens and businesses (and wealthy industrialists) that bought that debt. But in recent decades, it was foreign countries – countries like Germany, Japan, Saudi Arabia, and China – that were producing budget surpluses and looked at Treasury bonds as a safe haven for their extra dollars.

Germany was an early buyer of bonds. Japan became one soon thereafter. As the years passed, other countries became big buyers. When Saudi Arabia discovered it was sitting on an ocean of oil, it could think of no better way to save its excess dollars than by parking them in T-bonds, backed by the full faith and credit of the USA. After China abandoned government ownership of all businesses, it rapidly became a net surplus economy as well. And it, too, invested its extra dollars in US Treasury bonds.

Which is why you’ve probably heard some people say that the US dollar (and, actually, the American economy) has been supported in the last two decades by Germany, China, and Saudi Arabia.

But surpluses come and go. And about 6 years ago, China changed its priorities vis-a-vis saving its surplus wealth. It continued to buy Treasury bonds, but it also began to buy large amounts of gold. And perhaps more importantly, it began a massive investment in its own infrastructure and overseas ambitions.

“Luckily” for our government, large financial institutions (and particularly hedge funds) began buying (and trading) billions in US debt at the time. This increased the supply of dollars bidding for the T-bonds and, thus, kept the rates down to reasonable levels.

But in the last year, this supply of dollars diminished. That, and the continuing reduction in demand from China, put the Treasury in a terrible situation. If the supply got too small – less than the demand for dollars (our deficits) –  it was possible that the Treasury couldn’t keep up with its payments. That would mean a literally bankrupt USA. And that would mean the end of the world’s economy, as we know it.

In Greek tragedy, the hero is sometimes saved by a deus ex machina – i.e., an intervention by the gods. For America, that came in the form of the Federal Reserve. To make up for the reduced demand from bonds from our traditional buyers, the Fed began buying bonds itself.

Now you may be wondering how the Fed can afford to buy bonds. After all, it is a semi-autonomous central bank that is required by law to balance its books.

Here’s how Tom Dyson explains it:

“The Fed doesn’t ‘inject’ money supply into the economy. Instead, it ‘trades’ it or ‘swaps’ it via transactions with the entities it’s giving the money to. So, for example, if the Fed wants to give the government some fresh money, the government must give it some Treasury bonds. If the Fed wants to give a bank some fresh money supply, the bank must give it something in return.”

It’s called “quantitative easing.” And that’s how the Fed balances its books. It sits on a pile of collateral representing every dollar it has printed and “traded” for something.

Tom again: “Basically, the Fed is a bank that makes huge loans and takes collateral. And the collateral serves as its capital base.”

That is all good and dandy so long as the Fed can unwind these trades when the economy has stabilized by returning the collateral and receiving the dollars back. But recently, the Fed has moved into uncharted territory – making loans whose collateral is questionable, at best. For example, the Fed has recently started accepting the equivalent of junk bonds as collateral. There’s even talk of the Fed purchasing equities with its printed money.

Quantitative easing, as it was done after 2008, was a way for the Fed to help the banking system and lift the stock and bond markets. Back then, the Fed was giving dollars to banks and helping them grow. This was great for the banks and for Wall Street, but it wasn’t good for the economy because the great majority of those QE dollars remained within Wall Street.

About a year ago, the Fed began doing something it hadn’t done since April 1942. It agreed to monetize the government debt. The government’s need for dollars was at all-time highs. But because the usual buyers of T-bonds (foreign countries and, more recently, hedge funds) were reducing their buying, a crisis developed in the Repo Market – a critical market where the government finances itself with short-term loans. There was a “shortage of dollars,” as many analysts put it. A dangerous thing.

So what the Fed did was step into the gap and start buying T-bonds. Billions and billions of T-bonds daily to prevent interest rates from skyrocketing, which would then skyrocket US debt payments and put the Fed on the verge of bankruptcy.

As Tom put it:

“There are no more lenders. So the Fed is now being forced to assume the role of ‘lender of last resort’ to the Treasury… financing the US twin deficits and monetizing the Treasury’s debt. All with printed money!”

Quantitative easing is problematic for many reasons, but it didn’t erode the value of the dollar after 2008 because the stock market went bullish and stayed bullish until this year. The world and its economists, its politicians and its journalists took the rise of the stock market and the modest (3%) rise in GDP as a sign that the US economy could be trusted again. But what the Fed is doing now is different. It is not trying to save Wall Street. It is trying to save the Treasury itself. As Tom put it, this new strategy is “Project Argentina.” [See “Worth Reading,” below.]

On Friday, I hope to finish this series of essays on The Corona Economy. I’ll talk about how this new desperately-seeking-recovery strategy will put our government in an impossible situation that can only be resolved by a miracle or a long and devastating economic depression. And how you can both gird yourself against economic disaster and, at the same time, invest in the miracle that could be.

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“Credit is a system whereby a person who can not pay gets another person who can not pay to guarantee that he can pay.” – Charles Dickens

K and I were in LA for two weeks at the end of February. We were visiting two of our three kids and our four grandkids. If you’ve ever spent time with toddlers and preschoolers, you know they are always drooling, sneezing, and coughing. And often their parents are too. (Well, not the drooling.)

This is because young children are incredibly good at catching colds and the flu, and very good at spreading them. Typically, they infect their parents, who are also relatively young and healthy. Then their parents spread the cold or flu to everyone they come in contact with.

Thus, it didn’t surprise us to be showing symptoms of the flu when we returned to Florida early in March. We spent a week with symptoms. Normal for me. K usually recovers more quickly. And we thought nothing of it.

Two weeks later, when I began researching the coronavirus, I wondered if we might have caught it. But we had been in LA several weeks earlier than it was said to have started there. So I ruled out that as a possibility.

At the beginning of April, I was reading articles suggesting that the virus might have come to America significantly earlier than the experts had been saying. I speculated that it could be true. We now know it was.

Two recent autopsies proved that the virus was in LA in January, as the victims died on or about February 5. And several more reports confirmed it, with cases identified in late January and early February.

That is good news for everyone. It means that the actual lethality rate of COVID-19 is, indeed, much less than the case fatality rate. In fact, a recent antibody study suggests that 5% or more of the LA population is or has been infected. And that means, as I’ve been saying from the beginning, the lethality rate is just a fraction of 1%.

And this is hopeful news for me and K. Those flu symptoms we had in early March might just have been a dose of coronavirus that our adorable grandkids were kind enough to give us. I’ll let you know after my serology test next week. Meanwhile, back to my exploration of the Corona Economy…

The Corona Economy, Part III

What the Media and Our Representatives Don’t Understand 

Last Monday and Friday, we talked about the general state of the US economy. We took a look at its P&L and balance sheet and concluded it was a bankrupt enterprise that is losing money at an astonishing pace.

2020 will be a watershed year for the US. In terms of the usual data points that measure economic health, it has already neared or surpassed numbers that are as bad as we’ve seen in 100 years.

Unemployment is as high as it was in the Great Depression. The GDP is shrinking quickly. Government spending is at historic highs. Tax revenues are tumbling by the trillions. The federal debt is $24 trillion and will grow by $6 trillion to $10 trillion by the end of the year.

Those are scary statistics. And not just for Americans. Notwithstanding efforts by some countries to achieve economic independence in energy and other vital resources, the global economy is inextricably connected. When any country in the world sneezes, the rest of the world catches cold.

Few in Washington or in the mainstream media are alarmed about this. The attitude seems to be: We’ll deal with it after we defeat the coronavirus.

In fact, an ethos has spread that is disturbing. Being worried about the economy means you don’t care about human life. I see a parallel to the way they responded to the threat of the virus in its early stages. “It’s nothing to worry about,” they said. “We should go about our daily lives without concern.” (It was not just the administration that took this position in January and February. It was the pols and reporters from both sides of the aisle.)

It’s only gotten worse since then. The reportage of the pandemic has been politicized. The right presents hopeful new data as reasons to open up the economy. The left interprets the data darkly and insists that the closure should continue.

One hopes a crisis would bring people together. The Corona Crisis seems to have done that in Italy and Sweden and some other European countries.  But in the US, the divide is wider now than ever. And the animosity is higher.

So we stay in lockdown to slow the virus and, therefore, insure a second and possibly third outbreak. And we spend trillions of dollars we don’t have to “protect” American businesses and workers, even though all the spending is putting us on the brink of an economic collapse.

And yet, economic collapse (which is happening at an exponential rate) is not being discussed with the alarm it deserves – particularly among left-leaning pols and the mainstream media. Some of that is surely due to political animosity. But I think a bigger problem is the widespread ignorance of the way our government gets and spends money. This is true generally of the population at large. But what’s disconcerting is that the ignorance is widespread among the politicians that do the spending and the media that report on it.

A Simple Question 

This takes us back to where we left off on Friday. We know that our government is broke. We know it doesn’t have huge stockpiles of gold and silver or even dollars. So is it able to pay for the $6 trillion to $10 trillion deficit we are putting ourselves into right now?

It’s a simple question. I recently posed it to a few of my smart and educated friends. I’m talking about doctors, lawyers, business executives, and college professors. None of them had any idea.

That’s understandable. In most colleges, economics (let alone government fiscal policy) is not a required course. But you’d think that government officials that vote on spending bills and reporters and columnists that write about government spending would be well-versed on the subject.

I don’t think they are. In fact, I believe most of them haven’t the foggiest idea about how our fiscal and monetary policies work.

But you don’t need to understand these things to be a politician, a political reporter, or a columnist. Nor do you need to understand them to be able to function in almost any career.

I believe I could have had pretty much the same career I’ve had as an entrepreneur and business consultant without a background in fundamental economics. But I do think that the experience of running a business and trying to squeeze a profit from it for many years has given me a good understanding of some of it. Such as:

* There are several ways to make money: You can earn it, you can steal it, or you can be given it. The first is the best of the three because it won’t land you in jail and because it’s not dependent on the kindness of strangers. You are in control of how much money you make.

* The only way to earn money is to exchange something for it – your time, your expertise, or something you own.

* The best way to have that exchange is on a voluntary basis, with everyone free to buy or sell as they wish. This is called a free market. A free market, therefore, is the best way to create economic growth.

There is one more way to make money: You can borrow it and invest it and have the investment pay off the loan and leave you with a profit.

This is a standard practice of at least half the businesses in the US and the rest of the world. Some make the borrowing (debt-financing) work for them. Some don’t.

The trick to making debt-financing work is to invest the money in something that has a good chance of being profitable. That’s why investing in infrastructure generally makes sense for businesses and for economies. But spending borrowed dollars to pay for spending is generally a terrible idea.

You know this from your personal experience. You have friends and family members that are always maxed out on their credit cards, always hiding from their creditors, always getting into more and more debt because they borrowed money they couldn’t possibly pay back.

This is the core problem with the solvency of America right now, and it’s why it’s so important to understand how our government spends the trillions of dollars it doesn’t have.

The Idiot’s Guide to Monetary and Fiscal Policy in the US 

I’m hardly an expert in economics. And my understanding of fiscal and monetary policy has come very slowly over many years. In fact, before writing these Corona Economy essays, I asked Tom Dyson, a colleague who understands this subject much better than I do, to give me a refresher course. “Explain this to me as if I were one of your children,” I said. “Actually, no. Your kids are super-smart. Explain it to me as if I were a really dumb version of your kids.”

And he did.

Tom began by pointing out that there are two federal systems that operate together: the fiscal policies of the government and the monetary policies of the Federal Reserve, our central bank.

The fiscal system is what I was talking about on Friday. It’s how our government gets and spends its money. On the get side is tax revenue. On the spend side is everything our representatives vote for to get themselves elected: military spending, social spending, spending to support our businesses, foreign aid, etc.

If, in any particular year, the government spends more than it gets from taxes, it creates a deficit. If it spends less than it gets from taxes, it creates a surplus. (This is the fiscal counterpart of profit and loss.) In theory, we should want the fiscal system to balance the budget every year – or, in good years, to create a surplus.

In fact, since WWII, we’ve had a lot more years with a deficit than a surplus. I’ll get to that in a moment.

The Mechanics of Debt 

When the government runs a deficit, it has to cover that deficit somehow. The way that’s normally done is with debt. The Treasury posts a sign saying, “We need dollars. Anyone out there want to lend us some?”

This is done through Treasury bonds, which are basically loan contracts. [See “Did You Know?” below.] The person who buys the bonds is the lender. The government is the borrower. And as with most loan contracts, the borrower (government) promises to pay back the lender (bond purchaser) the amount of the loan plus interest.

If, for example, the government spends a billion dollars more than it makes in taxes, it must sell a billion dollars’ worth of Treasuries to make up the difference.

And if the government continues to runs deficits and sell bonds to cover them, it’s going to get deeper into debt.

The problem with growing debt is the same for the government as it is for businesses and consumers. The government has to pay interest on it. If the debt is great and the interest it has to pay is high, the government can find itself in a position where it’s forking over a large percentage of its income (from tax revenues).

A Potentially Catastrophic Problem… or Is It? 

This is a crude example, but it is essentially the problem that the US government has right now. It has been deficit spending almost every year for the past 70 years, and at the rate of more than a trillion dollars every year for at least 10 years. It has a debt of $24 trillion now and a loss in tax revenues of maybe $4 trillion. Add to that another $4 trillion to $6 trillion that it will be spending on the Corona Crisis, and its overall debt is likely to be $30+ trillion over the next few years.

But is that really a bad thing?

Common sense would tell you it is. But there are economists that will argue it’s nothing to worry about. At an interest rate of 1%, it’s “only” $35 billion. Our tax revenues can easily cover that.

Maybe. But what if our lenders – all those people, businesses, and countries that have been lending us that money (buying Treasury bonds) for so long – decide they don’t like the fact that the US has so little collateral. What happens if our credit dries up?

In fact, that’s already happened. You’ve probably read about it. It happened in what they call the repo market.

We’ll pick up on that next time.

“Performance is better than promise. Exuberant assurances are cheap.” – Joseph Pulitzer

The Corona Economy, Part II

Will America Survive It? 

Alec writes:

Today marks the 29^th day in a row that I have worn pants with a drawstring.

I went into Rand’s room this morning and woke him up. I said, “Rand, you have to get up.”

He raised his head up from his pillow and said, “Why?” Then he went back to sleep.

My wife is running a business with 10 restaurants and goes to work every day. She is busier than ever… as other restaurants gradually close, they are filling a growing number of carryout orders for breakfast, lunch, and dinner.

Her text this morning read, “Has at Costco $1.49.”

How she had time to text me, or what the text meant, I didn’t know. But thinking it might be vital information, I texted back, “WHAT??”

Her reply was, “G gas.”

I thought, “Wow, gas, $1.49 a gallon. I can’t remember when gas was that cheap. I’d better rush to Costco to get gas before they run out.”

I jumped into my car and backed out of the driveway. Then I realized: I hadn’t gone anywhere for 29 days. My gas tank is still full!  (Later, I did the math and I am driving an average of 0.7 miles a day. I may not need gas until the middle of June.)

But America will soon be “opening up again.” Not because Donald Trump wants it to.  Nor will it happen because we’ve passed the peak of the contagion. (There will be a second wave.) State governors will have lots to say about it, but they won’t actually make the important decisions. America’s people – its entrepreneurs, professionals, corporate executives, and employees will.

“Opening up” is  bit of hyperbole. Our economy was never truly shut down. It was regulated into a crippled gait. In six short weeks, the US has experienced a financial collapse it hasn’t experienced in a hundred years.

As I write this, for example, more than 22 million American workers have filed for unemployment. Millions more will surely be filing in May and June. Both Treasury Secretary Steven Mnuchin and the Fed’s James Bullard have said they believe that unemployment will bypass 20% and could end up higher than it was during the Great Depression of 1929.

The unemployment rate hit a record of 25% in 1933 – 4 years after the Great Depression – and remained over 14% during the entire decade of the 1930s. The highest rate since then was 10.8% in 1982.

Another concern: The 2008 financial collapse was triggered by mortgage defaults. What is happening today is just as serious – rent defaults. According to Rent Payer Tracker, as of April 19, one-third of the 13.4 million renters surveyed hadn’t yet paid their April rent, ordinarily due on April 1. An increase in rent defaults isn’t likely to collapse the economy by itself, but it reflects a trend I’ve seen even among friends and colleagues that are financially secure: People are reluctant to pay bills they don’t have to pay.

The big picture is the gross domestic product (GDP), the total output of the US economy. With so many businesses, large and small, inactive or unprofitable, Goldman Sachs projects that GDP could decline by 24% by the end of June.

Think about that. Total GDP output in 2019 was about $21.4 trillion. If it drops 24%, that’s an annual loss of over $5 trillion of economic activity. And that’s on top of the macroeconomic factors we covered in Part I of this series:

* The US government is currently in debt to the tune of $24 trillion.

* It’s been running at a $1 trillion annual loss for years.

* The Treasury itself is broke. Its bills exceed its revenues by several trillion dollars.

* The government recently spent $2.5 trillion it didn’t have.

* On the other side of the ledger, federal tax revenues will be at least $2 trillion less than they were last year.

Add it all up and you have an already broke government increasing its deficit by as much as $10 trillion in a single year!

The government is working furiously to avoid a total collapse. Their strategy is to give away trillions of dollars in paper money. They have already given half a trillion via the Payroll Protection Program and have committed to another half-trillion more. And that’s not counting the 1.5 trillion that went to bail out Wall Street.

As you remember from Monday’s essay, the US government doesn’t really have any wealth to distribute. It’s broke and is getting broker every day by billions of dollars. If, as I suggested, our government were a business, only a fool would invest in it or lend it money. But that’s how it’s been surviving these past several years – by selling Treasury bonds to the likes of China, Saudi Arabia, and Europe.

That’s of no apparent concern to some of our legislators and public thinkers. They are criticizing the giveaway so far for being too conservative.

Regarding the 20% to 24% projection of GDP loss, a NYT columnist said, “This time, with government deliberately shutting down commerce, it could well fall faster.

Only a World War II-scale response can make up that difference.”

And where will government get the money?

His answer: “At a time when inflation is close to zero and the government can borrow for 30 years at less than 2%, this is precisely the moment to borrow to underwrite a recovery that also modernizes the economy.”

Never before in US history has so much money been doled out so quickly and with so little understanding of or regard for consequences. Rarely have so many politicians from both sides of the aisle favored such a level of spending.

As Bill Bonner recently pointed out, the Small Business Administration giveaway is forcing banks to review and approve loans at a surrealistic rate.

“Every half a second,” he writes, “they’ve had to check out the facts… verify the value of collateral… and assure themselves that everything was on the level – after all, they were giving out as much as $2 million per application!”

“Who gets the money?” Bill asks. We can’t be sure. But when money is being given away so fast and furiously, there’s a good chance that much of it will be unproductive. “Like subprime mortgages in 2007,” Bill says, “All you need [to qualify] is a pulse. Even hedge funds are eligible.”

The millions that have been fired or furloughed will be getting a few hundred dollars a week while the shutdown continues. Meanwhile, the hundreds of US senators and representatives and their thousands of aides will continue at full pay while they try to spend our way out of all this mounting debt.

“Don’t worry,” they assure us. “We are going to take care of this.” Assurances from people that have never run a business and have little to no understanding of how a real economy actually works.

So what is it they don’t understand? We’ll talk about that on Monday.

“Imagine preventing health crises, not just responding to them.” – Nathan Wolfe

My Last Essay on the Coronavirus (I Promise!)

5 Important Questions; 5 Conclusions 

Once again, we were having a family argument about the coronavirus. The topic last night was: “Why Donald Trump Is Killing People With His Plan to Reopen the Economy.” But after a good five minutes of perfervid shouting, it turned into an argument about how dangerous the virus really is.

“And now COVID-19 is the biggest killer in America,” J said.

“That’s not possible,” I said.

“I read it in The Washington Post.”

Now J has been right about that damn lefty rag before, so I had to check my facts. I tracked down the article this morning. It was published on April 16. The author had given COVID-19 the “biggest killer” title based on a single week’s data.

J was right. The article made that claim. But I feel that I was right too. Because the “fact” that it was on the top of some chart last week doesn’t mean it is or is going to be the leading killer this year. As always, it will be heart disease and cancer. Coronavirus will do its share of killing. It will make the top 10, edging out suicide, kidney disease, and maybe even pneumonia (from common colds and influenza). But I doubt it will edge out accidents, lower respiratory, cerebrovascular, and Alzheimer’s diseases.

Today, I’m going to try to answer the question of how deadly this novel virus is as part of what I promise will be my final essay on the virus itself. (I will be following up on Monday’s essay on “The Corona Economy” with two or three more essays, and then I’ll probably join the fray and register my view of how the crisis will change the way we live. But that will be it!) 

There are four reasons this will be my final essay on the virus itself:

* I normally write about subjects I know, like business and wealth building and so on. It’s exhausting to have to research and check facts to support my conclusions about the virus.

* When I began writing about the virus in mid-March, I was presenting ideas that were largely contrary to what I was seeing in the major media. It was fun to make claims and predictions that seemed outrageous and might offend. But in five short weeks, the consensus of expert opinion, along with the media, has moved uncomfortably close to what I was saying then. I have no interest is presenting ideas that the world is accepting as true. There’s no point in it.

* My family, my editor, and even some of my loyal readers have asked me to stop. As SC said recently, “Enough already!”

* If we get the right kind of testing done soon – and it appears we will – there will no longer be an argument about the most important questions.

So what I’m going to do today is present my argument against The Washington Post claim, and then reiterate (with some revisions) the five most important questions and answers about the coronavirus and COVID-19.

Question One: Comparatively Speaking, How Deadly Is the Coronavirus?

Let’s begin with some big numbers. How many Americans will COVID-19 kill in 2020? And how will that number compare to America’s biggest killers?

I’m going to address the second question first, because part of it is easy to answer.

In 2018, the most recent year the CDC had published records for, the top killers were as follows:

1. Heart disease: 655, 381

2. Cancer: 599,274

3. Accidents: 167,127

4. Lower Respiratory Diseases: 159,486

5. Cerebrovascular Diseases: 147,810

6. Alzheimer’s: 122,019

7. Diabetes: 84,946

8. Influenza and Pneumonia: 59,120

9. Kidney Disease: 51,386

10. Suicide: 48,344

The first expert estimates for COVID-19, you may remember, were 2 million to 3 million. Dr. Fauci and team’s first guess was 100,000 to 240,00. Just before they announced that range, I had come up with a range of 85,000 to 205,000, which was published in my March 30 blog. Shortly after that, Fauci and team dropped their estimate to 60,000. But that wasn’t meant to be the death toll for the virus itself. Just how many would die by August first.

So how many will die?

As you’ll see from my answers to the next several questions, that’s impossible to know until we know how many Americans (and other populations) have already been infected. Based on what I’ve seen, I’m sticking to my original guess. But I’m going to narrow down the range. My current guess is more than 85,000 but less than 120,000.

Conclusion and Prediction: COVID-19 is not the most dangerous health crisis Americans face today. It won’t come close to heart disease and cancer, but it will be significant, killing more than 60,000 but less than twice that.  

Question Two: How Deadly Is the Coronavirus by Age Group?

Throughout March, the media focused a great deal on the fact that COVID-19 seems to be especially deadly to older people and people that have “compromised immune systems” or “comorbidity issues.” This had most of my coevals frightened.

Then, about two weeks ago, another narrative hit the headlines: It’s killing younger people too! Even babies!

And that scared the shit out of everybody.

Let’s take a look at these two claims by comparing CDC figures on deaths by age group for COVID-19 against deaths from cold- or influenza-induced pneumonia.

From the beginning of February until the middle of March, 682,565 Americans died.

Of those 682,565 that died, 13,130 (roughly 2%) died from COVID-19 and 45,019 (roughly 6.5%) from cold- or influenza-induced pneumonia.

COVID-19 Percentages (based on 13,130 deaths)

Under 1 to 24: 16 or 0.12%

25 to 34: 113 or 0.8%

35 to 44: 289 or 2.2%

45 to 54: 751 or 5.7%

55 to 64: 1,773 or 13.5%

65 to 74: 2,919 or 22.2%

75 to 84: 3,576 or 27.2%

85 and older: 3,693 or 28.1%

Cold- and Influenza-Induced Pneumonia Percentages 

Under 25: 111 or 1.8%

25 to 34: 117 or 2.2%

35 to 44: 188 or 3.5%

45 to 54: 441 or 8.4%

55 to 64: 963 or 18.4%

65 to 74: 1,152 or 22%

75 to 84: 1,165 or 22%

85 and older: 1091 or 20.8%

At a glance, you can see one thing clearly: The percentage of people under 25 that died from COVID-19 was extremely small – i.e., about one-tenth of 1%. That is less than half the percentage of that same age group (2%) that died from colds and flu.

From this, it seems reasonable to conclude that if you are younger than 25, your risk of dying from COVID-19 is effectively non-existent.

What about the other age groups? From 25 to 34, from 35 to 44, and so on?

To get a better sense of that, I clustered them into three groups: 55 and over, under 55, and under 35.

* 55 and over: 91% of those that died from COVID-19 were 55 years old or older.

* Under 55: 9% of those that died were under 55.

* Under 35: 3% of those that died were under 35.

Now let’s look at the same age groups for cold and influenza:

* 55 and over: 83% of those that die from influenza are 55 years old or older.

* Under 55: 17% of those that die from influenza are under 55.

* Under 35: Only 4% are under 35.

From Dr. Jean-Laurent Casanova, a pediatrician who studies the genetics of disease severity.

“What we’re seeing here is the same for tuberculosis, malaria, all infectious disease of humankind. Some people control the infectious agent very well, others die, and there’s everything in between.”

Comparing the two sets of data points above, we can see that:

* Older people (older than 54) represent a somewhat larger percentage of those that die from COVID-19 than from influenza. But it’s not a huge difference. It’s eight percentage points – 91% as opposed to 83%.

* The percentage of people under 35 that die from COVID-19 is virtually the same as for colds and influenza: 3% versus 4%.

* Virtually no one under 24 dies from COVID-19, compared to 2% for influenza.

In terms of age, COVID-19 seems to be less lethal than cold- and flu-induced deaths for people younger than 25, about 20% more lethal for people over 55, and has about the same true lethality rate for people under 55.

Conclusion: People older than 55 have a higher likelihood of dying from COVID-19 than they would from getting pneumonia. But it looks like it’s only 20% higher, so they shouldn’t be terrified. Their risk of dying from it is still less than 1%. People between 25 and 55 should be as worried about dying from it as they are about dying from pneumonia. And people under 25 shouldn’t worry at all.

Note: Yes, if you are under 55 and are in contact with older people, you should be concerned about spreading the virus to them. But that doesn’t necessarily mean you should be in lockdown, as I’ll explain in a bit.

Question Three: What Is the True Lethality Rate of the Coronavirus? 

If you have been reading my earlier blogs on this subject, you already know that I believe the true lethality rate of COVID-19 is much lower than the case fatality rates (CFRs) that were reported from the end of February. First, the reported CFR was 12% (based on Wuhan and northern Italy). Then it was 6% (based on I can’t even remember right now). Then the WHO announced that it was 3.4%.

In my March 30 blog, using the data available, I estimated the real lethality rate to be between 0.85% and 1.02%.

At the same time, or maybe a day or two later, everyone including Dr. Fauci and team), was estimating the rate to be 1%. (Which, of course, made me feel that I was doing the math correctly.)

But because there was no way of knowing exactly how contagious the disease was and how long it had been in the USA, I said that I thought the true lethality rate could turn out to be as low as one-tenth of that, or one-tenth of 1%.

We won’t know the answer until we’ve done enough random testing of the population (not testing of symptomatic cases). But there have been studies that point towards a rate of less than 1%. For example, in South Korea, which conducted random testing of more than 140,000 people, officials found the actual fatality rate to be 0.6%. And apart from Wuhan, the rest of China has reported a lethality rate of 0.7%.

Conclusion: The actual real fatality rate of COVID-19 is (and will be) between 0.2% and 0.4%, about double the rate for influenza but nothing near the estimates authorities were working with when they decided to shut down the economy.

Question Four: How Contagious Is the Coronavirus? 

On March 30, I said:

Let’s move on to the other metric we need to estimate the death toll: the Ro or reproductive rate – i.e., the rate at which the virus will spread from one person to others in close contact. Like the case fatality rate, this one has been going up in the past month. Since I’ve been tracking it, it’s gone down from 3.0 to 2.3.

A reproductive rate of 2.3 means that [on average] each person that gets the virus will infect 2.3 more.

An Ro of 2.3 may not sound so contagious – but if you do the math, you’ll discover (as I showed in that essay) that the virus can spread from one person to 11.6 million people in just 14 exponential steps!

The coronavirus is a very fast-moving bug. But that rate is not fixed. It’s dependent on its ability to move freely from one host to another. Without barriers, it can grow at these rates. And that’s why some of the earlier articles posted on social media were predicting that millions of Americans would die from it this year.

But nature doesn’t work that way. We are designed to combat viruses just as viruses are designed to infect us. The way we do that – the way we protect ourselves from all threats – is with adaptive behavior. In the case of snakes and lions, we wear shoes and walk carefully though the jungle. In the case of past viruses, those of us that were concerned with catching the flu – generally older people – got flu shots and avoided people with runny noses. As for younger people and their children, it was hardly a concern.

With the coronavirus, we have been practicing much more stringent adaptive behavior. Some of that has been voluntary and some of it has been mandated. These practices definitely slow the spread of a virus but they will not reduce the eventual number of Americans that will eventually be infected. That will be the percentage of the population we need for herd immunity.

One of the many things we don’t know now is how many Americans are now or have already been infected with the coronavirus. This we will find out soon – after we’ve completed several large randomized tests of the population. (Either the swab test for the virus itself, or the serology test for antibodies.)

The guesses I’ve seen ranged from 20 million to 60 million. To achieve herd immunity (more on this in the next section), we’ll need a lot more than that – possibly more than 100 million. Remember, the higher the number of infected, the lower the real lethality rate. Let’s hope that this bug has spread like wildfire. It will mean that we may have reached the peak already. And that means fewer deaths with each passing week.

Conclusion: The coronavirus is very contagious, at least as contagious as influenza. It is likely that it has already infected 30 million to 60 million. If we are lucky, we will discover that the number is much higher than that.  

Question Five: Has Social Distancing Really Helped Us Defeat the Virus

In my March 30 essay, I concluded that social distancing was good and necessary – especially in hotspots – because by slowing the spread of the virus, we reduce the risk of overwhelming our hospitals.

For the moment, at least, that strategy has worked. New York City, the “center” of the pandemic in the USA, is no longer short of hospital beds and ventilators.

But is social distancing the best way to conquer the virus?

Epidemiologists agree that the only way to extinguish a virus is through herd immunity. And as I said on Friday, herd immunity is what happens when a large percentage of the population has developed immunity. Depending on the virus, that percentage can range from 40% to 60%. When you get to those numbers, the virus cannot spread like it needs to because its host population is too small.

That is what happens every year with the flu.

According to the CDC, about 40% of the adult population in the US is vaccinated each year. That gives most of them (virus vaccines are imperfect) immunity for a year or two. In addition, tens of millions of Americans achieve immunity naturally by contracting the flu and recovering. That gets us to the 50% to 80% needed for herd immunity – and the virus dies off. (It usually peaks in two to three weeks and descends in an equal amount of time.)

But by imposing social distancing, we extend the virus’s natural life cycle and slow its spread.

That is why epidemiologists are warning us about a second and third wave. It is almost certain to happen precisely because of social distancing.

Conclusion: Yes, social distancing keeps hospitals from being overwhelmed. But it also interferes with the development of herd immunity. We can (and probably should and certainly will) “open up America.” But we will definitely have other waves of the coronavirus until at least 160 million (50%) of us have immunity.

So What Should We Do?

Everyone’s best hope is the development and deployment of an effective vaccine as soon as possible. And we are certainly working hard on that. Except for HIV, I can’t remember a time when so much effort has been put into creating a vaccine. But effective vaccines are not easy to develop. (We’ve been trying to develop a vaccine for HIV now for more than 30 years.) It’s generally agreed that, for the coronavirus, the best we can hope for is 12 to 18 months.

In the meantime, the virus will rise up and infect people every chance it gets. And if our policy is to continue with shelter-in-place, we won’t be able to stop the spread of the virus until an effective vaccine is ready. (And available in sufficient supply to immunize 100 million Americans.)

The only sensible option is to allow the virus to spread. Not freely, but in a controlled way that is based on what we know about its lethality.

If we accept the facts that (1) herd immunity is the only way to kill the virus, (2) the real fatality rate is 0.1% or 0.2%, and (3) a vaccine is a year or so away, doesn’t it make sense to try to achieve herd immunity as quickly as we can, while doing everything possible to isolate those who are most vulnerable?

By achieving herd immunity naturally, by isolating the vulnerable but otherwise letting the virus spread, wouldn’t that render the second and third waves of the virus weak or even impotent?

The administration has issued its guidelines. They are based on gradually opening up the economy. This makes sense from a distance. But the guidelines do not take into account the data that is most important to know: the fatality rates by age group.

Rather than being guided by social distancing, which segregates everyone, we should have different approaches for different vulnerability groups. We should have a policy that isolates the most vulnerable (over, say, 75 years old and anyone with a seriously compromised immune system), promote social distancing for people between 25 and 75, and let everyone under 25 resume their regular activities. That way, we would allow the virus to spread quickly through the population of people that have the ability to withstand it. And that acceleration will get us to herd immunity soon, probably in weeks. Once we reach herd immunity, we won’t have to worry about a second or third wave. (Most of the 600,000 Americans that died of the Spanish Influenza of 1918 died in the second wave.)

And What Should You Do?

I can’t tell you what to do – but I’ll tell you what I’d do.

If I were younger than 25 and had children, I wouldn’t worry about them or me getting sick and dying of the virus. The odds of that happening are probably the same as the odds of dying in a plane crash.

I would be comfortable interacting with people of my age and younger. But I would not interact with anyone older than 65 or anyone younger that had comorbidity issues.

If my children or I did get infected, I would keep us isolated until I was sure we were not just symptom free but tested negative so that we would not infect others.

If I were older than 25 but younger than 65, I’d feel free to interact with people under 25 and I’d keep a social distance from people of my age group.

And if I were older than 65 and worried about getting infected and dying, I’d self-isolate and stay isolated till there was herd immunity.

I am older than 65 but I’m not worried about getting infected and dying. If I did get infected, my chances of living would be better then 80%. In terms of getting and spreading the disease unwittingly, I’d follow the social distancing rules I mentioned above.

One more thing I’d do and advise anyone else to do. If I got symptoms, I wouldn’t wait to get an appointment with my doctor. I’d get tested not just for COVID-19 but also for any other upper respiratory disorder, including influenza. I’d do that because I understand that you don’t die from the bug itself. You die from pneumonia. And pneumonia, when treated early, can usually be treated with antibiotics.

Looking at it from a social perspective, the bottom line for me is that old and immune-compromised people should self-isolate. And the rest of the world should look forward to getting back to the sensible adaptive behaviors that are recommended for treating influenza.

“Economics is a subject that does not greatly respect one’s wishes.” – Nikita Khrushchev

The Corona Economy, Part I: Will America Survive It?

New York City is losing billions in tax revenues, and Mayor Bill De Blasio is going to have to lay off thousands of city workers. He is upset about this. He’s calling on the Trump administration to bail out the city. “We can’t do anything about this,” he pleaded. (I’m paraphrasing.) “Only the federal government has the power to help us.”

Many in my family feel that we should keep the economy shut down “for as long as it takes.” They also say that the federal government should keep cranking out financial aid “for as long as it takes.”

“Human life is more important than money,” they say.

The trouble with mixing ethics and economics is not that they are incompatible. Quite the contrary, they are inextricably linked. The problem is that if you talk about them simultaneously, you never get anywhere.

Both subjects are important. Neither is dispositive or scientific. But economics has the advantage of a vocabulary of facts and a language of numbers. Thus, if you want to have the conversation about both, it’s better to start with the facts and numbers.

So let’s do that.

* As of April 13, 1.1 million small business loans had already been approved, totaling $253 billion in bailout money. By the time you read this, the federal government’s $350 billion small-business relief fund will be nearly exhausted.

* The total “relief package” already enacted will cost about $2 trillion. There is good reason to believe that we will have a second and perhaps a third one at that same level.

* On April 17, we learned that more than 5.2 million Americans had filed for unemployment benefits that week – which means that the virus put more than 22 million out of work in less than a month.

* There are about 127 million households in America earning, on average, about $150,000. (That’s the mean, which counts the rich people. The median income is $60,000.) Ten million unemployed, multiplied by, say, $100,000, is $10 trillion. At an average tax rate of 20%, that’s $2 trillion in lost federal tax revenues.

* Tens of thousands of small businesses, representing hundreds of billions of dollars in tax revenues, have been shut down. Many of them will not reopen.

* For some years now, the federal government has been running at a deficit of about $1 trillion a year.

* Total US debt is nearing $24 trillion and rising fast.

Would You Invest in This Company? 

Think of the federal government as a business. I know that it’s not a business, nor is it intended to be. But hear me out.

You are an investor, trying to decide whether you want to buy this company.

The first thing you do is look at a spreadsheet of the financials – a P&L (profit and loss) statement and a balance sheet (assets minus liabilities).

You look first to the bottom line of the P&L, which tells you how profitable this company is. Hmm. Can that possibly be true? Is this company really losing $1 trillion a year?

Maybe they are investing for future growth, you tell yourself. Maybe, like Amazon in its early days, the Feds are spending money they don’t have in order to acquire income in the future. But when you look at the company’s projected income, it’s going the wrong way. Projected tax revenues are going down. Way down!

And what about its balance sheet? What about the company’s net worth? You glance at the liabilities and what do you see? You see $24 trillion in debt!

Surely, the company’s assets must offset this figure. You check that side of the ledger, and you see about $500 billion worth of gold (by today’s prices). Okay. You also see that the company has a great deal of valuable property (national forests and monuments and buildings and so on). But that property is  encumbered. It can’t be sold.

From this perspective, the US looks like a terrible business opportunity, right? It’s big-time broke and losing billions of dollars every day.

And thanks to the Corona Crisis, that debt and those losses are going to pile up faster than ever. The current bailout package is estimated to cost $2 trillion, bringing the projected loss for 2020 to $3 trillion. But to make matters worse, tax revenues are crashing. As I said above, it’s likely that they will drop by as much as $2 trillion this year.

Meanwhile, Mayor De Blasio is facing a fiscal crisis. Tax revenues are down more than $8 billion. And even with firing thousands of city employees, New York will still be short more than $6 billion by the end of this year… just to pay its upcoming bills.

That’s why he is complaining about Trump. He knows he doesn’t have a magical way to create the dollars he needs to solve his problem. But the federal government does.

The government has the Treasury, which issues Treasury bonds (IOUs), and it has the Federal Reserve (the central bank) which, among other things, decides how much interest it will charge US banks to borrow money from it. But the Fed can also, if it wants, put “liquidity into the system.” What that means is that someone that has access to a database that keeps track of the money supply (how many dollars are out there) hits a button and billions (or trillions) of dollars that never existed before appear out of nowhere. This is what most economists mean when they say “printing dollars.” (We’ll get into that in more detail in Part IV of this series.)

This is why some people are worried about the economy now. The federal government is in crazy debt and is losing money faster than it ever has before. Millions of people are out of work and tens of thousands of small businesses are dead in the water. That means a lot of pain and suffering. And the possibility of a deep depression like we haven’t seen in 100 years.

You may be thinking, as my brother-in-law said last night, that these facts and numbers must be false. After all, everyone knows that the USA is “the richest country in the world.” It can afford a shutdown of three to six months. You may be thinking, as some have said, that the economy will bounce back to full strength as soon as we get past this pandemic.

Maybe. But I doubt it. If I’m going to bet, and I probably will have to, I’m going to bet that things will get worse before they get better.

I’ll tell you why I am pessimistic on Friday, in The Corona Economy, Part II

The Coronavirus and Making Friends With Your Devil 

A friend of mine, an economist and investment analyst, sent me a note saying that he is “expecting” the coronavirus pandemic to lead to absolute disaster, both in terms of public health and the economy. He may be right. He may be wrong. So I didn’t think it would help him if I countered his expectations with evidence to the contrary. What good would that do? It wouldn’t change his mind about his expectations. It would only change his view about my perspicacity.

So I sent him an abbreviated version of the following – an essay I’ve written a dozen times in response to a dozen different scenarios in the past 20 years. 

The Prologue 

Whenever I realize that I’m worried about something that might happen in the future,  I use a 4-step technique that I call “Making Friends With Your Devil.” I started working on it about 30 years ago, and have refined it and strengthened it along the way.

Before I explain how I use it now, I’ll give you an idea of how I developed it.

Sometimes K and I would plan something – something as simple as going to the zoo on the weekend or as complicated as taking a European vacation. When we were young and single, such plans were rarely thwarted. But when we had kids, thwarting was less the exception than the rule.

When it happened, I would get angry. I would feel miserable. I was not pleasant to be around. K was almost never like that. She seemed to take disappointment with a grain of salt. She would shrug it off and move on. I was jealous of that and determined to learn how to do it.

For insight into why I was getting so upset and a clue about how I could deal with these inevitable letdowns with more equanimity, I looked into two schools of philosophy: Stoicism (not Zeno or Epictetus but Marcus Aurelius and Seneca) and Zen (secondary sources).

I won’t quote any of that stuff here. You know it as well as I. But I will say that I found it helpful.

I was getting upset, I decided, because I had a strong habit of attaching myself emotionally to every decision I made about what I was going to do. And the solution was to detach myself from that emotional attachment the minute I made any decision about the future.

If, for example, K and I made plans to go to the beach on Sunday, I would – the moment we agreed that we would do it –  imagine waking up on Sunday to find that it was rainy and cold. I would imagine myself saying, “Okay, let’s go to a movie instead.” And then I would allow myself to be a little bit attached to that secondary plan. I would imagine myself enjoying a movie.

It worked. It virtually eliminated all emotional disappointment when things didn’t happen as I had planned. Sometimes, in fact, I was almost happy about it, because I had already imagined enjoying Plan B.

This little trick served me well over the years when dealing with minor disappointments. And eventually, I was able to springboard from it to dealing with larger issues – preparing myself for the worst sorts of disappointments in every area of my life.

Now, for example, whenever I make a major business or financial investment, I do all the normal calculations of possible outcomes, from best to worst. But I resist the urge to dwell on the best, which, I have learned, almost never materializes. Instead, I focus on the worst-case scenario.

When it comes to investing, the worst-case scenario will usually be losing every penny. So I imagine myself losing my entire investment. And I either get comfortable with that, or I hold onto my money.

The Four Easy-to-Hard Steps 

Okay, that was the history of the technique. Now, here’s how to do it…

 Step One: Imagine all the possibilities – from best to worst. Once you’ve identified a worst-case scenario, imagine the details, the specific problems you could be facing. In the case of the current pandemic, the problems might range from running out of toilet paper (minor problem) to running short of food (big problem) to defending your property (bigger problem) to (worst possible problem) someone you love contracting the virus and dying from it.

Step Two: Imagine the actions you would take. Decide how you would deal with each one of these potential problems. (Don’t spend a moment thinking about what you might have done leading up to where you are now. Focus on the future.) Imagine the specific decisions you would make and the specific actions you would take.

Step Three: Imagine how you would feel. For the less-severe problems, it should be easy to imagine yourself acting calmly but with purpose, intelligently but with compassion. But with the serious problems, this will be more difficult. In the case of the coronavirus pandemic, the hardest thing to imagine would be how you would feel if a loved one contracted the virus and died from it.

Step Four: Make friends with your devil. This is the most difficult step (until you get used to doing it). It’s part Stoicism, part exposure therapy. Allow yourself to experience the worst-case scenario by imagining that it has already happened. It will provoke angst, anger, and great sadness. But imagine yourself getting through it. Imagine yourself accepting this outcome and accepting it. Acceptance lessens the anger and the grief. Imagine those bad feelings diminishing. You are searching for a sense of peace – and that is what you will find.

If this sounds preachy, please forgive me. Preaching is what I do.

And before you accuse me of hypocrisy, I will say what I always say when so accused: Were it not for hypocrisy, I’d have no good advice to give at all.

LA Story and More on the Challenge of Charity 

One was refusing to eat. The other was smearing yogurt on her face. The toast was burning. And Baxter, the 160-pound mutt, was humping my leg.

Of all the childrearing experiences we’ve been reliving on this trip to LA, getting the grandkids off to preschool in the morning has been the most traumatic.

By the time the twins finished breakfast, most of the food was on the table. We had an hour left before they had to be in school. They hadn’t yet bathed or dressed. And they were still hungry. What to do?

Welcome, yet again, to my morning slog, where I work out problems, big and small, including those I’m having with the 28 books on my to-finish-before-I-die list.

On Monday, I shared the first part of an essay I’ve been working on for one of those books – The Challenge of Charity. Here’s the second part.

The Challenge of Charity: A Good Reason to Say No 

I not only had a philosophical objection to giving my friend the $50,000 he asked for, I had a pragmatic reason.

The money he was asking for was intended to cover a years’ worth of expenses for his non-profit – the cost of hiring mentors and providing various services to the ex-convicts the program was helping.

Giving him the money would not have fixed the problem. At best, it would have pushed it off for another year.

I asked him if he was looking to build an endowment for his program. He said he hadn’t thought about it.

“But you don’t want to have to go to the trouble of raising 50 grand every year,” I said. “You don’t want that kind of stress, do you? And what about when you die?”

He shrugged his shoulders.

The Endowment Decision 

When I got into the charity business, I told him, I was funding projects the way he was about to fund his, covering expenses a year at a time. I did that without thinking much about it because I was in my 50s and death was an insubstantial theoretical. I was earning good money and enjoying my work. Contributing a portion of my earnings every year was easy. A no-brainer.

But when I hit 65, I had to face the fact that I would not live forever. More importantly, that before I died, I would probably be making changes that were likely to drastically reduce or end my income from working.

It was then that I realized I needed to establish an endowment. I needed to start an account that would be owned by our family foundation, but legally segregated and dedicated to funding the yearly expenses of the charities we were supporting.

I have a similar view of the businesses I’m in involved in. When it’s  a business that I like (and I’m proud of), I get sentimentally attached to it. I want to see it grow and prosper. I want to do what I can to ensure that it will be around.

It’s not easy to do this with a business. You have to work to ensure that it is “anti-fragile.” This means populating its leaders with quality people – growers and tenders that have the same aspirations as you. It’s also a good idea to segregate some of the yearly profits into a war chest that can take the business through hard times. In my mind, that war chest is like an endowment for a charity. It needs to be large enough to cover significant unexpected expenses. It also needs to be protected from people in the future that could spend it unwisely.

Why Endowments Make Sense 

“If,” I told my friend, “instead of raising money to cover the budget every year, you were able to build an endowment large enough to support yearly expenses from dividend distributions… then once the endowment were fully funded, you wouldn’t have to worry about yearly fundraising. You would know that your program would continue in perpetuity, even after you are gone.”

“Wouldn’t it be nice,” he said.

So I explained what I had learned about endowments. The first and most important point is about how much you need to pay for the program you are running.

For example, FunLimon (our family’s community development center in Nicaragua) has an annual budget of about $150,000 a year. That number will go up as we add a few more buildings and programs that we are currently implementing. I’m guessing the final budget will be about $200,000 in today’s dollars.

How much do you need to fund $200,000 in annual expenses?

Well, it’s not $2 million (as I naively thought, for a happy moment, when the idea of an endowment first came to mind). Two hundred grand is 10% of $2 million, and the stock market has a long-term history of yielding ROIs of 10%. But the stock market is volatile. And taking out anywhere near 10% would be disastrous. The conservative number is somewhere between 3% and 5%.

I decided on 4%. And 4%, as you know, is a 25th of 100. That means the endowment must be 25 times larger than the $200,000 yearly budget. It has to be at least $5 million. To be safe, I set the target at $6 million.

“The good news,” I told my friend, “is that your budget is only $50,000. That means you only have to raise $1.25 million to fund your endowment.”
He didn’t react. Perhaps he was shocked.

Why Endowments Are Attractive to Big Money 

So I kept the (by this time one-sided) conversation going.

“But here’s something I have learned about raising money for charitable programs,” I said. “Sophisticated businesspeople and investors understand the value of financial war chests. They are much more inclined to contribute mega-bucks to endowments than to covering yearly expenses.

“This is also true for large non-profits that allocate money for smaller programs,” I said. “They are more likely to write million-dollar checks for the endowments of worthy programs than for transactional programs, however worthy they may be.

“There are billions of dollars out there right now in funds looking for charitable investments. If you could put your energy into getting some of them to help you fund your $1.25 million endowment, I can’t imagine you wouldn’t be able to have it fully funded in just a few years.”

We talked about how he could do that, how he could identify possible donors and present them with the right kind of pitches, proposals that would fit into their stated purposes. Writing such proposals is not rocket science. And I pointed out that there are lots of books and reports and experts out there that could teach him how to do it.

The takeaway – for me, at least – is that if you want your for-profit business or non-profit charity to survive you, you need to figure out how to (gradually) create a financial war chest that is at least 25 times your yearly nut.

Problem solved. So now, back to the kitchen table… 

I don’t know how I thought of it, but I remembered an interview with Marie Kondo, the adorable author of The Life-Changing Magic of Tidying Up and star of “Tidying Up With Marie Kondo” on Netflix. The interviewer asked Kondo how she had time to do everything she was doing and take care of a house and two small kids.

Kondo said that she had taught her kids to do their own chores. The interviewer was skeptical. These were three-year-olds (like our twins). But Kondo said that they actually liked cleaning up. They even sorted their own clothes, folded them, and filed them neatly, Maria-Kondo-like, in their wardrobes.

So I brought a spray bottle of window cleaner and a roll of paper towels over to the table and challenged the twins to clean it up themselves. One was reluctant. The other took the bait. Two minutes later, the other one wanted in. Five minutes after that, the table was squeaky clean.

Big Dogs and Big Asks 

Walking down Ambrose Avenue with Baxter at my side, I spotted another dog walker coming up the street towards us.

This was my first time walking Baxter since he was a puppy. I didn’t know what to expect, so I cinched up the lead.

Baxter is big and strong – so strong that when he jumps up on people, he often knocks them down. When the doorbell rings, he barks like a mad dog. He’s got a deep, ferocious bark. It’s scary.

But on our walk so far, he evinced none of these traits. His mood was pacific. His gait, like mine, more than an amble but less than a stride. And for an untrained animal, he accepted the lead very well.

Still, I didn’t know how he would respond to this approaching dog. If he lunged at it, would I be able to hold him back?

Welcome, again, to my morning slog, where I work out problems I’m having with all kinds of things, especially the 28 books on my to-finish-before-I-die list.

Today, I’ve been working on a book I started in (maybe) 2008 called The Challenge of Charity. It’s meant to be a series of essays about the very real “challenges” of charitable giving.

 I’m not sure if the following essay will make its way into the book. Any feedback you can provide will be appreciated.

The Challenge of Charity: Why I Don’t Give (Much) to Big Charities 

He’s a good friend of mine. His project – helping recently released convicts return to the “real” world – seemed, on the face of it, a worthy cause.

He launched the program with a friend, a wealthy woman who funded it. But that funding was discontinued after a year. He wanted to know if we (our family foundation) would take it on.

As I’ll explain in a minute, I don’t contribute to large charities. But when friends are involved, I give a token amount, usually $500 to $1000, as a gesture of support.

In fact, I had donated amounts like that to this friend once or twice before, so I was thinking he was looking for a donation in the same range.

He wasn’t. He was asking us to fund the program’s entire yearly budget. “How much was that?” I wanted to know. It was $50,000.

Fifty grand a year is a big ask.

“Isn’t your program part of a larger foundation?” I asked.

It was. A 50-year-old organization with a budget of more than $30 million a year.

“Fifty thou is a tiny percentage of that. Why don’t you ask them to fund you?”

“We asked, but they declined.”

“They turned you down?”

“They did, but they really like us.”

I suggested that they might be bluffing. “What if you said if they didn’t fork up the cash you’d have to close down the program?”

“We tried that. They said they would be sorry to see us go.”

Something was awry.

What was going on?

Here was a seemingly good program run by an intelligent person with a passion for it – and he was asking the foundation for only one-sixth of 1% of their $30 million budget.

To me, the denial meant one of two things: Either they didn’t believe in the program but were too dishonest to say so. Or there were dirty politics involved.

I asked my friend lots of questions about the foundation. He had very few answers. “That’s the frustrating thing,” he explained. “They aren’t forthcoming with that sort of information.”

This is one reason I don’t believe in donating significant amounts of money to large, public non-profits.  Their internal logic is not visible to outsiders (notwithstanding the reports they are legally required to file).

Another, more important, reason is that I cannot control what they do with my money.

These may seem like bad reasons. I don’t think they are. Let me provide an analogy.

If you have read anything I’ve written about wealth building, you know that I have two sacrosanct rules for directly investing in individual businesses:

* Do not invest in a business that you know little or nothing about.

* Do not invest in a business over which you have no control.

Breaking the first rule will often (almost always) result in disappointment. Something will happen – something I didn’t expect because of my ignorance – that will cause the business to underperform or fail completely.

Breaking the second rule will mean that even if I anticipate a practice or policy that could hurt the business or see an opportunity for growth, I can only suggest it. I won’t have the authority to make sure it is pursued or even taken seriously.

Following these two rules has saved me millions by keeping me from putting serious money into dozens of exciting business ideas that have been pitched to me over the years.

Because non-profits operate very much like a business, I’ve found that the same two rules work with them. I want to know how the charity works from the inside out before I consider “investing” in it. And I want to have some control over what they do with my money.

I do that because of a fundamental belief I have about giving people money: More often than not, it is a bad idea. The benefit it gives in terms of financial relief is more than offset by the damage it does in terms of entitlement, dependency, and other unintended consequences.

These are not theoretical deductions drawn from things I’ve read. They are conclusions I’ve come to after dozens (if not hundreds) of personal experiences with charitable giving.

So as much as I wanted to please my friend, I wasn’t going to give him a big yes to his big ask. I could have told him what I just told you, but I was afraid he would see that as disingenuous. He might think it was an excuse I was coming up with because I was either critical of his program or just plain cheap. I needed to shift the conversation. I needed to take another tack.

To be continued with my next slog. 

Meanwhile, back to Baxter…

As it turned out, Baxter didn’t flinch. The other dog, a cocker spaniel, started barking furiously and charging at him. But Baxter acted like, “You are too small for me to even acknowledge.”

On the way home, there were other similar “attacks” – all by smaller dogs. It seems to me that smaller dogs are generally more aggressive than larger ones.

Is that true? And if it is, is it also true of humans?

Shaun, my Uber driver this morning, grew up in Atlanta. He had a smooth, caramel-colored complexion and a voice to go with it. He was young and instantly likeable. What made him likable? I’m trying to figure that out.

He was a talker. I don’t normally warm to talkative drivers because I like to spend my commuting time working. But Shaun talked because he was curious. He asked questions, all kinds of questions. And he asked as if he were really interested in my opinion.

He told me how he ended up in LA (on a whim), how he was working two jobs (to save money to start a career). Then he asked me all sorts of questions about what kind of career I would recommend.

I was charmed by his total lack of bravado (which I would have expected from a man of his young age) and his trust in me.

When we arrived at my destination, I wanted to keep talking. Heck, I wanted to adopt him. I gave him my card. I have a good feeling about him. Maybe one day he’ll give me a shout, ask me a question about his career. Maybe one day I’ll be able to help him.

Achieve More in Your Career – Faster and Easier – With a Mentor, Part 2 

It was 1983 – the first “Financial Newsletter Publishers’ Roundtable,” and I was representing a small but up-and-coming publisher based in South Florida.

During the last several hours of the otherwise convivial meeting, the discussion turned towards the “immorality” of selling subscriptions for $49 a year. People were upset. Some were livid. And their ire was directed towards me.

It was confusing. Embarrassing. I felt like I was being ambushed.

What I didn’t know going into the meeting was that the $49 that we were charging for our newsletters was half that of what everyone else was charging. They felt that we were trying to break into their market by discounting our prices. They were right. But I didn’t expect them to care.

After the meeting ended, I was in front of the hotel, about to get into a taxi to take me to the airport, when one of the attendees came up behind me and asked if he could share the ride. I agreed, mentally preparing myself for a lecture. None came. He talked about the weather and the meal we had for dinner the previous night. Finally, I had to interrupt him and ask him why, considering the way I had been attacked in the meeting, he would want to ride with me.

“Oh, that,” he said. “Don’t worry about that. It’s just politics. There is business and there is politics. Politics is bullshit. We are going to move to the $49 price next month. You guys have done a great job with it. People gripe in public, but in private we don’t pay attention to any of that.”

I can still remember the feeling I had. I couldn’t believe that he had been excoriating me a half-hour earlier, and now he was saying he was going to follow our lead. It was a watershed moment for me. I knew I was learning something important, something I would never forget.

There are hundreds of other brief conversations I’ve had with friends and colleagues and strangers that gave me new insights and ideas about my businesses or my role in business – each one a lesson that had immeasurable value to me as I moved forward with my career.

In Part 1 of this essay, I talked about traditional mentorships – where an experienced businessperson works closely with a younger person for a long period of time.

Today, I want to talk about this other type of mentorship – the conversation you have with a speaker at a conference or an author at a book signing or a guest at a wedding… or any other chance encounter.

For lack of a better term, let’s call these experiences – solitary and removed as they may be – transactional mentorships.

Chance Encounters Can Change Your Life 

Is it possible to accelerate your progress in your career by increasing the number of such experiences?

I think it is. Moreover, I think it’s possible to develop a “bullpen” of smart, powerful, and influential players in your industry that you can call on not just once but whenever you need help.

I’m talking about people that would normally be unapproachable.

It can happen. I’ve seen it happen. It’s happened to me. But it can also go badly wrong. To develop your own A-Team of supporters, you have to do more than collect phone numbers. You have to spend some time to figure out a good reason why each one might want to help you. In other words, you have to make the relationships fair. You have to figure out a quid for the quo.

The Quid Pro Quo in a Transactional Mentorship

As I explained in Part 1, “Traditional mentorships work because the benefits of the relationship are shared. The mentee advances his/her career by following the good advice of the mentor, and the mentor shares in the increased value of the business as the mentee contributes to it. At the same time, the mentor has the satisfaction of helping someone else succeed, while the mentee has the comfort and support of someone with power and privilege.”

A transactional mentorship is a different kettle of fish. Since there is no common business interest between mentor and mentee, there’s no natural quid pro quo either.

But you can create one.

At a business conference, industry event, book signing, and so on, experts come expecting to answer questions. “Paying” for the answer you get is as easy as prefacing your question with a compliment – telling the expert something specific that you liked about his book or his speech or his business. Although doing something so obvious may seem cheesy to you, it won’t come across as cheesy if you say it with sincerity.

You can make the same sort of ego payment on paper or in email: one specific and sincere compliment followed by one specific and sincere question.

Note: When I say make the compliment specific, I mean specific to that particular person, to his particular career, or to a particular accomplishment of his.

And when I say make the question specific, this is important. The compliment will let him know that you admire him. But it is the question that is the quid for the quo, because it gives him the pleasure of solving your problem or otherwise giving you his advice.

As someone who has played the role of transactional mentor countless times, I can attest to the fairness of the deal. I’m always flattered to be asked and happy to answer questions, because it makes me feel good. The transaction is balanced. It’s a win-win.

Making the Most of a Transactional Mentorship 

Having a brief interaction with an expert in your field can be extremely valuable. Even better is to convert it into something more.

How is that done? That’s the million-dollar question. And there is no single answer. We are talking about building a longer-term, balanced relationship when the obvious factors – knowledge, access, influence, and wealth – are all on one side. And it’s going to be different for every potential mentor on your list.

This is what I recommend…

You begin with that first contact. It could be a chance in-person encounter… or it could be a quick email that you send to your prospect. You say something specific that is complimentary. And you ask a specific question. (If you’re doing this by email, you can expect to get an answer 20% to 50% of the time.)

Follow up with a personal thank-you note. Make it a handwritten note. Thank your prospect graciously, but don’t go on too long. Insert your business card. It will probably be tossed, but it will be glanced at. And that will increase the chance that he will remember your name.

After you’ve had a chance to implement his suggestion, write to thank him again and to announce the good news – that it has had some positive effect on your life/career. Keep this note brief, as well. And specific.

A month or two later, contact the prospect again. This time, you can do it via email – and this time, he is almost certain to remember who you are.

The purpose of this contact is to remind him of the great help he has already been to you… and ask for a quick personal meeting to talk about your career. In his office, if possible – or, if he’s located out of your local area, via a 15-minute phone call.

If he agrees, and you get along, you’ve got yourself an “occasional” mentor. An important person in your field who would be willing to take your call or respond to your email whenever you have a question.

How great would that be?

What to Expect From This Relationship

Keep in mind: This is not a traditional mentorship where there is a financial quid pro quo in place. With occasional mentorships, there is natural imbalance. The mentor’s reward will always be something he or she can do without, so it’s going to be difficult to maintain equilibrium. There will always be a tendency towards entropy. It will be the rare occasional relationship that continues for years.

Compensate for the fragility of the relationship by having not one but a half-dozen or a dozen people on your occasional mentor list.

Be polite. Be complimentary. Be specific. And be thankful. Make it a habit and your career will take off.

“It can be no dishonor to learn from others when they speak good sense.”– Sophocles

Achieve More in Your Career – Faster and Easier – With a Mentor, Part 1 

It can take a decade or more to become the successful person you want to be. But you can shorten your learning curve – even drastically curtail it – by getting advice and support from people that have more experience than you.

The results of a study commissioned by the Elliot Leadership Institute at Johnson & Wales University are typical. Researchers surveyed senior executives and middle managers in the foodservice and hospitality industry. What they discovered was that a vast majority of those who had been mentored felt that the experience had helped them build all kinds of leadership skills. Skills such as decision-making, strategic thinking, planning, coaching, and effectively managing others.

All the research surveys and articles I’ve read on business mentorship make the same point: It works.

Of course, there are different types of mentor/mentee relationships.

There is a traditional relationship, where a senior person sort of adopts a younger person and gives him/her advice and support for an extended period of time. And there is a kind of temporary or transactional relationship, where a knowledgeable person answers questions or gives advice to someone he/she doesn’t know on a one-time basis.

Most studies on mentoring are focused on traditional relationships. And these, as I said, work very well. But temporary mentoring can be worthwhile, too.

I’ve had three major mentors in my career from whom I learned a great deal. But I’ve also had dozens of equally important one-time interactions with experienced entrepreneurs and investment experts.

I’m going to talk about the two types of mentorships in two parts. Today, I’ll talk about traditional mentorships – and in part 2 of this essay, I’ll tackle transactional mentorships.

What I Learned From Leo 

From Leo, my first post-college boss (and eventual partner), I learned the importance of persistence and determination. I learned that I could sometimes accomplish goals and objectives that seemed unattainable merely by being doggedly indefatigable.

I will never forget, for example, the trauma and the triumph of the Honda.

We had a little company car, a Honda, for random errands in the city. One day, the engine seized. The mechanic explained that if you don’t put oil in the engine for a month after the indicator light has gone on, this is to be expected.

Leo didn’t see it that way.

He had me call Honda Motors every single day. My job was to convince them that it was their responsibility to pay for replacing the engine. It didn’t seem to bother him that I thought it was futile. He kept assuring me that I would succeed. “You are a winner, Mark,” he’d almost shout at me. “You can make this happen!”

Well, I’ll be damned if (after what might have been six months of calling Honda) I didn’t end up at the top – with a senior executive that probably took the call only to find out what kind of nut I was.

He listened politely and then calmly explained what I already knew. I think he thought that getting a “no” from him would be the reward I had been looking for and I would stop harassing them. In fact, were it not for Leo, he would have been right. I was a 20-something new-hire in a tiny company talking to a VP of Honda.

But there was Leo.

So I told the VP the truth: that I was flattered and grateful for his attention, but I was employed by a maniac who literally could not take no for an answer… which is why I needed him to give me the number of his boss so I could call him the following day.

He was flabbergasted (and told me so) – but he gave the okay for Honda to pay for the new engine.

My takeaway from this was not that I should try to get things I don’t deserve by being endlessly annoying. Thanks to Leo, the experience of forcing myself to make those phone calls – believing they were futile and then finally succeeding – gave me core confidence about my ability to persist that I don’t believe I would have had, even today.

What I Learned From JSN 

From JSN, my second major mentor, I witnessed another version of what determination can do, but I learned other lessons from him, too – lessons about what a business must do to survive and prosper.

The first lesson JSN taught me – by firing a woman who at that time was running his business – is that the rules that work for big corporations don’t always apply to new ventures.

This woman had held a senior position in one of the largest publishing companies in the world. That’s why JSN hired her. He would raise the money for the business newsletters we were publishing. She would do everything else.

She was good at getting our newsletters written and out the door, and she was great at making sure everything was done right and documented. But she didn’t know anything about how to market products when you don’t have a multimillion-dollar budget. She was spending money on good-looking ads, but the money JSN was bringing in was flowing out with negative ROIs.

The day after JSN fired her, he brought me into his office and told me that he was going to rely on me to help him grow the business. I felt totally unprepared. I had been hired a month earlier as an executive editor.

“Why me?”

“Because you are the only person she didn’t like,” he explained. “She wanted you gone because she felt you were a threat to her. The moment she recommended firing you, I knew I was going to fire her.”

Then he said, “Okay. Now lets you and me talk about starting this business.”

“Starting?” I said. “I thought we were already in business.”

“No,” he said. “A business isn’t started until the first profitable sale is made.”

Through trial and error, we figured out how to do that. Eleven years later, when we sold the company, sales had climbed over $100 million.

What I Learned From BB 

From BB, a client/partner, I learned, relatively late in my career, many additional business secrets – one of which has been very, very valuable.

It was a lesson in management.

JSN was very much an alpha dog and he managed his business-like one. When I came to work with BB, I unconsciously brought a bit of that alpha dog with me.

I had been brought in to run the business, and the way to do that, I believed, was to figure out what to do and then make sure everyone did it. It took me less than a week to realize that BB had no interest in having his business run that way.

His way was to hire smart young people, find desks for them to sit at, and tell them to do whatever they wanted to do. At the time, he was the sole producer and earner for the company – and he did it very well, bringing in millions every year. So his laissez-faire management style wasn’t as crazy as it seemed.

I was tempted to try the my-way-or-the-highway style I had perfected with JSN, but I did my best to imitate what BB did, knowing that I would still be far more “directive” than he would ever be.

I soon discovered that there are many invisible benefits to managing your business (really, your employees) his way. The most obvious and immediate is that it’s much easier. You don’t have to solve every problem and design every strategy. You can “shirk off” (BB’s words) some of those responsibilities to others.

Another benefit of laissez-faire management (that I didn’t fully understand until years later) is that it tends to weed out weaker players and advance stronger ones. Because decisions are constantly pushed downward, people at the bottom get more experience than they would in a typical hierarchy. Laggards fall behind and eventually disappear. Superstars emerge.

Yet another big and unexpected benefit is greater diversity. I don’t mean racial/ethnic/gender diversity. (The invisible benefits of that kind of diversity are mostly negative.) In giving employees more freedom to make decisions and take on jobs and make suggestions, you naturally create a business with more – and more diverse – ideas. Not just about protocols and procedures but also about the key elements of entrepreneurial growth. How to sell potential customers more and better versions of what they want.

Thanks to BB’s example, I have had the rare experience of watching a company grow its revenues by a factor of more than a thousand. I am absolutely sure that it could not have happened if I had tried to grow the business any other way.

What You Can Learn From Your Mentor 

Traditional mentorships work because the benefits of the relationship are shared. The mentee advances his/her career by following the good advice of the mentor, and the mentor shares in the increased value of the business as the mentee contributes to it. At the same time, the mentor has the satisfaction of helping someone else succeed, while the mentee has the comfort and support of someone with power and privilege.

The benefits are so many and so obvious that you would think every employee would make it a priority to find a mentor. In fact, most never do. They plod along at their jobs, trying to move forward. But they don’t really know what to do and what not to do because they are in new territory and they refuse to ask for advice from someone that’s been there before.

That’s dumb, but I understand it. I have a hard time asking for help. (I can’t even ask for directions when I’m lost.) But I managed to acquire three great business mentors in my life, and I think I did it because I had a realistic view of my role in the relationship.

Until Leo saw that I was willing to make those hundreds of phone calls, he had no reason to believe that I could be anything more than an assistant for him. But when I achieved the crazy goal he set for me, he began to treat me differently. He saw me as a young man that could help him grow his business. He began to treat me as a mentee.

Something similar happened with JSN. He recognized my potential early on. But until I showed him that I was committed to helping him achieve his goals for the business, he didn’t fully trust me. Less than a year after I earned his trust, I was a minor partner. He told me he was going to make me a millionaire. Several years later, I was.

If you’re at the beginning or even the middle of your career, a traditional mentorship can definitely accelerate your progress. But don’t expect to get all the benefits without giving something in return. Reciprocity is the foundation of every healthy relationship. It’s true of mentorships too.

Your mentor is investing his time in you in the expectation that, as you become a more valuable employee, you will do whatever you can to repay him. In most cases, that will happen by your good work, by making his job easier and/or more profitable. But sometimes you will be able to repay him by helping him out if and when you pass him by.

In Part 2 of this essay, I’ll be talking about transactional mentorships with powerful businesspeople – and how you can benefit from their wisdom, contacts, and benevolence.