“The best early-stage venture capital investments appear obvious in retrospect; however, very few of them are actually obvious when you make them.” – David Sze

Early-Stage Investing: What You Need to Know About This Hot New Alternative to the Stock Market 

In the financial advisory business, angel investing is on fire. After years of watching college drop-outs become billionaires, many individual investors today are not happy with a long-term return of 10% on their stocks. They want more. And they believe they can have more with “early-stage” investing.

My clients that publish investment information are being dragged into this once esoteric corner of the market by customer demand. As a result, I’m seeing a stream of new information products and promotions generated by them.

I’ve done a lot of early-stage investing during my career. And I’ve learned a thing or two from the mistakes I’ve made. Despite those mistakes, I’ve done well over the years because a handful of these companies grew quite dramatically. There’s no doubt that early investing has contributed to the bulk of the success I’ve had.

But there is a difference between what I did and “angel” investing. I was always a founding member of the companies I put money into. I was, in other words, a first-stage investor.

Angel investing is second- or third-stage investing. As an angel, you are invited to put your money into a company after it has begun operations and, in most cases, is already making money. Which makes it, in my view, an entirely different kettle of fish than the kind of direct investing I did. Angel investing is riskier because (a) you don’t know the business or the industry very well, and (b) you have no control over its operations.

One thing I’ve done for many years that is similar to angel investing is putting money into limited partnerships that were developing real estate – apartment buildings, office buildings, single-family homes, and hotels. As a limited partner, I had limited knowledge of those real estate deals, and little influence on how the general partners ran them. By comparing what they did to what I knew about the direct investments I’d made, I was able to figure out some fundamental patterns that were typical of the businesses that flourished and those that failed.

The most important thing I’ve learned from this experiment is that, although it’s easy to identify business plans that make zero sense and/or feel flaky, it’s very difficult to be able to discern, among 5 to 10 good-looking business plans, the one that will become super-successful.

And so, I decided on this approach: (1) find someone I trusted to do the initial vetting for me, and then, (2) buy a dozen or more of his/her recommended companies, and (3) hope that one of them will be the breakthrough company that makes up for the rest and gives us the big results we need to make the whole effort pay off.

Recently, I’ve been reading the advice published by some of the investment advisory publications that have been touting angel investing. In the past week, for example, I’ve read 3 essays on how to do it. Two of them, I was disappointed to discover, provided advice that was not very helpful:

* Understand what you’re investing in.
* Know how much you want to invest before investing.
* Be patient.

The third essay was written by Roy Bahat, head of the Bloomberg Beta venture fund. I liked his advice because it sounded like it was based on experience A few examples:

* Expect (and embrace) the downside.

“Naïve angels worry about salvaging money from their losing investments,” says Bahat. “Experienced angels worry about keeping the upside by investing at a reasonable valuation so the winners make up for the losers.”

* Avoid deals that come with any mention of guaranteed returns.

“Extra control provisions, options in future iterations of the company, and milestone-based valuations are also no-nos,” he says.

* Take many bets.

Bahat recommends investing in a dozen companies to get your feet wet and to “get the hang” of the market. But, he says, a portfolio of 20 to two dozen companies will give you the best chance of success.

I’m sure there are far more secrets to be learned about angel investing, but those are a few that make very good sense to me. In future issues, I’ll update you on how my family’s basket of start-ups are doing and tell you what more we’ve learned about how to play this game smartly.

“New ideas pass through three periods: (1) It can’t be done. (2) It probably can be done, but it’s not worth doing. (3) I knew it was a good idea all along!” – Arthur C. Clarke

If Ready… Fire… Aim Is the Right Idea

What Does Ready Mean? 

Ready, Fire, Aim is my recommended strategy for starting a new business. Most people understand the basic idea: Don’t wait to launch until everything is perfect. There will be time for refining the details later. For every business that fails because of inadequate preparation, nine fail because procrastination.

In a previously published essay on this topic, I argued that the first and most important responsibility of a founder or CEO in launching a business is to move as quickly as possible from the initial idea to a profitable sale. What most wannabe entrepreneurs do instead is spend months and sometimes years in research and development – trying to get everything perfect – before they try to make the first sale.

One of the most important lessons I learned about entrepreneurship was from JSN, a brilliant businessman. He said, “a business isn’t a business until you make your first successful sale. Until then, it’s just an expensive, time-consuming hobby.”

If you can grok that, you can understand that starting a business is always a race against time. You begin with an idea, a certain amount of dollars, and your confidence in the idea. Then you get to work, fueled by these limited resources. It’s a long race, a race in stages, but the finish line of the first step is very simple. It is making your first profitable sale.

Every new business begins with two essential ingredients: an idea and the ambition to make that idea real.

Both are necessary. The ambition must be strong. And the idea must be good. If the ambition is weak, the start-up will fail before the idea is tested. But if the idea is bad, no amount of ambition will make the business succeed.

Anyone interested enough in entrepreneurship to be reading this far, has ambition. Whether that ambition stays or grows or fades depends to a great degree on the “goodness” of the idea.

How Can You Tell – Before You Start Spending Your Time and Money – If Your Idea Is Any Good? 

The easiest way to start a new business is to work for several years for a successful company in an industry that appeals to you, learn how they do what they do, and then develop a version of one of their best-selling products that you can make either cheaper or better.

When you take that approach, you are beginning with a proven concept – a product idea that you know, for sure, is in demand. In trying to make your version better – by making it more useful, more appealing, or less expensive – you may err. But because the product is already proven, you should be able to correct that error fairly quickly by testing alternatives.

If you are starting a business about which you have little or no knowledge and experience, the task of figuring out if your idea is a good one is much tougher.

Here are some things you can do…

1. Assess the size of the market.

If you have been working in an industry for several years – and especially if you‘ve been in a sales or marketing role for several years – you should have a good idea of how big the market for your product is. If you are new to the industry, this kind of information is not difficult to find.

Also find out the average size of the companies that comprise the industry. In most industries, there are three levels: 3 to 5 businesses at the top whose revenues comprise about half of the entire industry, a dozen or two in the middle, and many in the third tier.

What you are looking for is a market in which that second tier is a size you believe you can reach. Information marketing, for example, the industry I’ve spent the most time in, is probably a $10 billion industry (excluding the mainstream news media and book publishing). The six or seven industry leaders, including two of my clients, have total revenues of about $4 billion. (Only one is above $1 billion. The rest are about half that.) In the second tier, there are about a dozen companies between $100 million and $300 million, for a total of about $2.5 billion. And then there is a third tier of perhaps 500 businesses with revenues of $10 million to $50 million that comprise the other $3.5 billion.

Your chances of getting into that top tier in fewer than 20 years are not strong. If you would be happy getting into that second tier, with revenues between $100 million and $300 million, your chances are not great, but it is possible. Your chances of getting into that third tier, though – with revenues in the $10 million to $50 million range – should be good.

You have to ask yourself if you are satisfied with those odds. If not, you should consider another industry.

2. Assess the strength of the industry. 

You want to enter an industry that is growing. The faster, the better. A rising tide lifts all ships – and most especially the small ones.

The industry I mentioned above – the digital information industry – was microscopic in the late 1990s. For us, back then, it was not much more than an academic exercise. We wanted to learn a bit about it in case it took off.

It did take off, and for the next 10 to 15 years the growth was spectacular. The revenues of my largest client rose by more than 10 times, from $100 million to more than $1.5 billion. Some of the smaller businesses I owned and/or advised grew even  more spectacularly. A few of them grew by more than 100 times.

During those early years, all you had to do to succeed was vaguely imitate what we were doing. And hundreds of companies did. Experience and expertise were helpful, but not necessary. And there were hundreds of businesses that became large businesses with initial capitalizations of just a few thousand dollars.

That time is past. The digital information industry is still growing, but at mature rates. To break into it now, you’d need to know what you are doing and have a bankroll of hundreds of thousands of dollars – at the very least.

3. Look for a marketing advantage. 

Example: I was an early investor in a business that intended to sell shaving razors. There were two or three companies that dominated the market, and dozens more chasing their leads. Trying to compete with them would have been a long stretch, but the founder of this new business wasn’t interested in that. He wanted to market to the upper end with high-quality razors selling for hundreds of dollars.

So our business plan was designed accordingly. We would market directly to wealthy investors (a market we had access to) and move from there.

It was a slow start, but our marketing advantage (not only direct access to buyers but also expertise in direct marketing) allowed the founder and his team to fuel some early growth.  As the years passed, adjustments were made. The business is now profitable and looking promising. (In fact, I just invested in it again to get it to the next level.)

4. Assess the strength of your USP. 

The USP (unique selling proposition) is the idea you have about how to distinguish your business and its lead products from the competition.

You can get a good idea of its uniqueness by doing a Google search of the main players and then reviewing their advertising materials. (Don’t worry about the little players. They won’t be your competition.) But prepare to be surprised. I can’t tell you how many great USPs I’ve drummed up over the years, only to find that there was nothing new or unique about them.

If your USP is unique, you still have to answer this question: Is it strong? Strong enough to give you a significant marketing advantage? And there is no way to determine this objectively, because none of the big boys (the companies that have proven they know how to sell their products) are using it.

This is where you turn to trial and error – i.e., “beta testing” your USP.

If, for example, you want to start a cookie company and your USP is some sort of super-duper chocolate chip cookie, you can easily beta test that by selling your cookies at local festivals and green markets. What you are looking for with such tests are strongly positive responses. A modestly positive approach to your USP is not enough to bet your time and money on – no matter how much you believe in it. If the market says, “It’s nice,” go back to the kitchen.

5. Ask yourself: “Are my sales targets realistic?” 

Your product idea is useful. It provides a big and easily expressed benefit to your customer. There is a good-sized market for it, and you have a USP that you have tested with positive results. Now it’s time to double-check your original calculations.

* Reconsider your estimate of market size based on what you learned from your beta testing. You may have discovered, for example, that your product works very well to one sector, but not at all to another. Make that adjustment.

* Reconsider your sales conversion targets. Based on whatever research and testing you were able to do, recalculate your sell-through rates. Let’s say your original projection, based on research or intuition, was closing one out of five sales efforts. In the beta test, you closed only one out of seven. Make that adjustment.

* Reconsider refunds and chargebacks. Often, in our enthusiasm for a new business idea, we have unrealistic expectations about the percentage of customers that may request a refund, or we fail to consider that some percentage of credit card payments will be charged back to you for lack of funds. Again, based on what you’ve learned in this initial stage, make that adjustment.

6. Create 3 spreadsheets. 

Based on the numbers you’ve come up with so far, create 3 spreadsheets: one that is optimistic, one that is realistic, and one that is pessimistic.

The optimistic spreadsheet should come from the numbers you have been left with after double-checking all your estimates, calculations, and expectations.

For the realistic spreadsheet, take your optimistic numbers and make them about 20% to 30% worse. This may feel like a pessimistic calculation at this point. Trust me, it’s not. At best, this is a realistic calculation.

Then, for your pessimistic spreadsheet, take your realistic spreadsheet and make those numbers worse by another 20% to 30%. This spreadsheet, with numbers that are roughly half of what you think of as realistic, is the pessimistic expectation of what the business might do.

7. Be pessimistic. 

The next step is a difficult one, but it has to be done. You should now take your optimistic spreadsheet (the one that you probably believe is actually realistic) and throw it away. Then take the next 3 steps based on your numbers from the realistic and pessimistic spreadsheets.

8. Ask yourself: “Do I know the tasks that need to be done to launch the business?” 

Before you put ay business idea into action, it pays to create a short list of the primary tasks that need to be completed.

Such a list needn’t be elaborately detailed, and it shouldn’t take more than a few hours to put together. But it could prove very useful in identifying obstacles, estimating costs, and – most important – determining the team you will eventually put in charge of the product.

9. Ask yourself: “Can I do these jobs myself?” And, if not: “Do I have great people that can do them?” 

Every great idea needs great people to make it succeed. So before you move into action on any significant business idea, stop to ask yourself, “Who can help me get this done?”

Start by choosing a primary champion for the main idea – a person you think has the personality to get the idea actualized. A champion must (a) believe in the idea, (b) have the authority to execute it, and (c) have the experience to make wise decisions along the way. If you have no champion and no time to champion the idea yourself, it may be better to postpone implementing it.

In addition to a primary champion, a good idea may need other talented people to play key roles. Who can produce the product? Who can test it in the marketplace? Who can be in charge of fulfillment and operations?

At this early point in time, it’s not necessary to have a full roster of support people. But you should at least know who your champion will be and have some idea about who will be your supplier/producer, marketer/seller, and fulfillment/operations person.

10. Ask yourself: “Do I have a Plan B, an exit plan, in case my good idea turns out to be a bad one?” 

Sometimes (not often, but sometimes) everything is there. The idea is good, it feels right, it tests well, and it has good people behind it. Yet the product falls on its face when you roll it out. If you have a Plan B – a “What if it fails?” plan – rather than being blindsided by such an unlikely event, you will be much better prepared to act.

Like other aspects of “getting ready,” developing a good Plan B doesn’t need to take a lot of time. Details can be easily worked out later if you know what your get-out strategy is before you start.

The key to making a Plan B is to set stop-loss points at the outset – measurable points that determine, ahead of time, whether you will continue to invest money in the project or drop it.

Don’t make the mistake of thinking that failure won’t ever happen to you. I can tell you stories about great projects that failed: a seemingly brilliant idea for a new record club that cost one of my clients $125,000… a “can’t-miss” celebrity health newsletter that lost $780,000 before we gave up on it… and a magazine that was going to make millions that cost us millions instead.

I remember reading that when Ted Turner was planning CNN, he found that he had done such a good job promoting the idea that his partners and top executives weren’t willing to even entertain the idea that it might not work. Since he knew full well the value of being prepared, he kept asking the question “What if it fails?” until his associates gave in and put together a fallback plan.

CNN started off terrifically – and when the company hit financial problems seven years later, they already had a solution. In this case, it was to sell a portion of the business to cable operators. Turner’s early insistence on a Plan B allowed the crisis to be overcome without anyone breaking a sweat.

“Creative without strategy is called ‘art.’ Creative with strategy is called ‘advertising.’” – Jef I. Richards

The Problem With Most “Good” Marketing Copy”

“Sales been growing amazingly for two years. Now, all of a sudden, they’re flat. Worse, they’re in the red. I’ve looked at the P&Ls and the marketing reports. I’m 90% sure the problem is in the marketing. In any case, something is terribly wrong. And we have to figure it out and fix it fast. This needs your immediate attention.”

This email was sent to me by a client in 2009. At that time, the sender, the founder of the business – an information marketing company – was living abroad. He wasn’t able to come back to the States to try to fix the problem himself, so he was asking me to see what I could do.

I jumped on a plane the next day and spent the flight looking through the numbers. When I arrived, I met with the CEO. We spent the afternoon poring over her marketing campaigns and comparing one to another.

“It makes no sense to me,” she said. “We can’t seem to get a new campaign to work anymore. The backend is suffering, too.”

She was right. During the prior 3 years, sales had skyrocketed. More impressively, profits had more than tripled to more than $8 million.

We looked first at the media she was targeting. My belief is that of the three key factors that affect marketing success – media, offer, and copy – media matters most. You can have great advertising copy and irresistible offers, but if you direct them to the wrong prospects, the results can be close to zero. But when we compared her media buys to those of her competition, there was almost no difference.

It wasn’t the media.

Next, we looked at her offers. Were they perhaps aiming at a cart value that was too high or too low for the market? They were not. Were their terms and guarantees comparable to the competition? They were.  Were the offers themselves easy to understand? Yes, they were.

The offers were not the problem.

Could it be the advertising itself?

I considered every campaign she had done in the past several years. It was obvious that Pareto’s Principle was at play here: 80% of the revenues had come from less than 20% of the campaigns. In fact, nearly 80% of the growth in new buyer revenue had come from a single campaign. When that stopped working, everything else did too.

Now we were getting close to the answer. The sudden and steep decline in sales had occurred in a period of time that trailed the descending responsiveness of this single advertising promotion.

They had tried to replace it with something as good or better. More than a dozen different angles had been tested against the “control,” but they all failed.

So, I took copies of the control – that original advertising piece that had worked so well – and all the promotions that had been written to replace it. And I spent the weekend going through them again.

I didn’t actually need the whole weekend to figure out what was going on. The problem was evident in the first replacement piece I studied. The problem was B copy. All the subsequent copy that had been tested was much, much weaker than the control.

B copy is the sort of advertising copy that all marketers are most familiar with. It’s good. It’s solid. It sells benefits, not features. It is written in plain, comprehensible language. It makes big promises, whether explicit or not. And it adheres to the invisible architecture that all good rhetorical writing must adhere to.

B copy works for 80% of the commercial market. It works for brand advertising. It works for B2B (business-to-business) advertising. It works for local and regional advertising. But it doesn’t work in the most competitive markets, which include information marketing (my client’s business).

To achieve sales success in competitive markets, you have to target the right media and present the proven offers, but you must also use A or A+ copy. B copy won’t do it. The advertising piece that had created that three-year sprint of grow was A-level copywriting. Everything else afterwards was B or B+ at best. Not good enough. Not nearly good enough.

That was one problem. But the even bigger problem was this: The CEO couldn’t tell the difference.

Passing the Pink House in Winter

With Unmitigated Joy 

What I loved about you then was your profile –

how you were always looking out into some

middle distance. When I would speak to you it

was difficult to know if you were even listening.

It was the side of your face I knew and your

half-amused, half-transported smile. It was

beautiful to see, and impossible to fathom.

It was a lot – a lot more than I was used to – but it

wasn’t enough. We met after the fall and you left at

the end of the winter.

Much later, reading your journal, I discovered how,

when we walked every evening to the gas station to

buy cigarettes and beer, you were thinking about

that sign in front of the pink house, advertising

fortune telling. You said you imagined her customers

to be a menagerie of people like us, “lost souls,

worried about the future.” You said people are like

sailors looking for patterns in a clear night’s sky,

“irradiated by a billion, glittering galaxies.”

I remember one cold afternoon as we passed the

pink house, you noticed a squirrel had made its way

down from a nearby tree, across the snowy yard and

up and onto the sign. It was sitting there looking

back and forth, as if it were worried. You asked me

what I thought it was doing. I said it was doing what

squirrels always do. You asked what that was. I said

I didn’t know. “I guess it’s looking for food.”

In your journal you wrote, “It was then that I

realized the squirrel was somehow the Chosen One.

It had perched on the sign not because it was a sign,

but because it was hungry.” You said that the squirrel

“didn’t need signs, for what it had was hunger.”

You said, “Everything more than that is a burden.

Hunger is enough.”

If I knew then what I know now, I could have told

you that I had that hunger, but it was not enough.

“What you get by achieving your goals is not as important as what you become by achieving your goals.” – Zig Ziglar

Becoming and Being 

“If you want to be a writer, you have to write. A writer is someone who writes.”

I was 16 years old when my father said those words to me. I was crushed.

Being a writer was all I’d ever wanted to be. And by pointing out the paucity of my literary output compared to the strength of my literary ambition, I felt like he was telling me that I had failed.

I’d written my first poem when I was about 8 years old, and had already decided that I would be a writer when I grew up. It was a single quatrain with a simple rhyme scheme (AABB), titled, precociously and pretentiously, “How Do I Know the World Is Real?”

Although I didn’t know it at the time, my father was a credentialed writer, an award-winning playwright, a Shakespearean scholar, and a teacher of literature, including poetry. I’d often seen him, weekday evenings and weekend mornings, hunched over student essays, muttering and occasionally reading out loud passages to my mother, who would give him a knowing smile.

I don’t remember how I drummed up the courage to show my fragile little poem to him, but I did. And the moment I did, I regretted it. But instead of the negative critique I was expecting, he put his hand on my shoulder, squeezed gently, and said, “You may have a talent for this.”

I wrote poetry and short stories in the years that followed, but I was not, as the cliché goes, obsessed with writing. I had other interests – touch football, the Junior Police Club, a burgeoning interest in girls, etc. As time passed, I wrote less and less. But in my subconscious somewhere, I still yearned to be a writer.

Like most wannabe writers, I rationalized the infrequency of my writing by telling myself that all these other activities were “life experiences,” and that I needed lots of them to become the writer I wanted to be. But in developing this excuse, I was building a structure of self-deception that many people live inside when they abandon their dreams.

I continued to write sporadically throughout my high school and college years. But it wasn’t until the mid 1970s, when I made the decision to take a job with a small publishing company in Washington, DC, that I began to write every day. And every day, my skills improved. If I hadn’t made the effort to take that job, I would have continued, as many wannabe writers do, to tell myself that I was making progress. To write occasionally but publish nothing.

I’ve been writing regularly now for about 45 years. There are still miles between the quality of my writing and that of really great writing, but I have earned a very good living from the writing I do. Good enough to call myself a professional writer.

So many people live their lives failing to become what they want to be because they don’t work on their goal on a daily basis. Whether it is fear or ignorance or laziness, or a bit of all three, they rationalize their lack of commitment with all sorts of seemingly reasonable excuses.

How many times have you heard someone say that they will travel the world or paint paintings or write a book…. one day? And when you hear that, what do you feel? Happy for them because you are confident that one day they will accomplish that long-held goal? Or sort of sad for them because you are pretty sure they never will?

And what about you? What is it that you want to be but haven’t become? What goal or project or task do you keep talking about accomplishing yet never do?

When my father told me that “writers write,” he was saying that I had lost the right to call myself a writer when I stopped writing. But, in retrospect, I can see that he was telling me something else, too – something even more important: I could regain the title the moment I started writing again.

We are at the beginning of another year. It’s as good a time as ever to get to work. You don’t have to give up your day job. You don’t have to put your family in second place. But you do have to begin to practice whatever it will take to become the person you want to be.

“An expert is someone who has succeeded in making decisions and judgements simpler through knowing what to pay attention to and what to ignore.”

– Edward de Bono

Stock Investing: The 4 Key Metrics I Look at for Future Gains 

35 years ago, I was a partner in a profitable business. Every year, my boss/partner and I would sit down and decide how many of those profit dollars we would put in our pockets and how many we would leave in the company for future growth.

Before then, I didn’t even know this was something company owners did. I always assumed that  shareholders pocketed 100% of the profits each year. In fact, that’s not possible. Businesses need cash flow to operate current activities, and savings (capital) to invest in new projects and products. If you take out all the profits, it’s nearly impossible to grow.

There is no hard and fast rule for what percentage of profits should be retained and what should be distributed to shareholders. The ratio depends on lots of things: the economics of the business itself (i.e., whether it’s labor or capital intensive, whether it generates or consumes cash, whether the ROIs come quickly or slowly, etc.) plus the growth ambitions and greediness of its owners.

In that long-ago business, there were only two partners: my boss/partner and me. It was, as I said, very profitable. It gushed cash and had no debt. So, in theory, we could take a good percentage of the profits each year. And we did. We typically banked 70% to 80%. This made us personally very wealthy, but it was a bit of a strain on the business – and probably hindered its growth. We peaked at revenues of $135 million.

15 years later, when I took a minor ownership interest in another, similar business, I was shocked to discover that the protocol was to distribute only 10% of the yearly profits to shareholders. This, at first, appalled me. For every thousand dollars of profit we made, our cut was only $100 – of which my partner would get $88 and I’d get $12!

It took a long time to get used to. But, in retrospect, was mostly a smart move. Retaining 90% of the profits allowed us to grow the business without ever borrowing money. And it meant we always had plenty of cash to pay for our mistakes.

That second business grew quite large – to more than 10 times the first one. But eventually we realized that leaving so much cash in the business had an unintended negative consequence: It encouraged a culture with too much financial space for sloppiness and wastefulness. A higher percentage of distribution would have been better.

A third business, which was born out of the second, was developed by a protégé of mine. He distributed a good deal more than 10% of the profits to us, to himself, and to other key players to whom he gave equity. This business had better overall results, both in terms of growth and its eventual value.

So, what does this have to do with investing in public companies? It taught me a lesson about one of the key metrics I use to assess them.

Metric #1: Dividends History 

Every business, as I suggested above, has its own internal dynamics. So there’s no such thing as a percentage of retained profits that is right for all industries, let alone all businesses. But I can say this: When I’m looking at companies to invest in – private or public – I like those that are committed to retaining the cash they need to solve unexpected problems and invest in growth, while at the same time distributing profits to shareholders as often and as generously as they can.

It says something important about the company’s management: that it is cautious, not greedy, and yet understands the importance of rewarding stakeholders along the way.

So that is the first of the four metrics I look at when investing in stocks: a history of paying dividends to shareholders. I want to know how often the company pays out dividends… and how much.

Metric #2: Earnings History 

With a few exceptions, I want to see a steady growth in revenues. A volatile sales history makes me nervous – especially when I can’t figure out why it’s so erratic. A steady increase in revenues is at least an indication that the people running the business understand how to make it grow. You’d be surprised at how often this is not the case.

The rate of growth is important, too. For small companies, I like to see faster growth. After the first several years, I want to see significant growth – 30% to 50% a year. Then, when the business gets to the $100 million level, I’m happy with 20% to 30%. And when it breaks through the $500 million barrier, I’m comfortable with 10% to 20%.

Occasionally, I make exceptions to these expectations. But only when I can clearly understand why growth was less and how it might recover. If I’m too far away from the business to understand the why and how, I stay away from them.

Metric #3: Recent Sales 

The history of earnings is very important, but I also like to see how sales have been doing in the past 6 to 12 months. This is important for the most obvious reason: I want to make sure that something really bad hasn’t happened since the company’s last annual report.

Metric #4: Current Industry Status 

In Delivering Happiness, Tony Hsieh compared investing in businesses to playing poker, the only casino game where the odds are not stacked against the player. The most important rule of poker, he said, is what table you are playing at.

If you choose a table that has too many players, it is difficult to win even if most of them are amateurs. If you choose a table with only a few players all of whom are experts, it is difficult, too. The right table is one where your odds of winning are the best, and that is a table where the expert competition is limited.

The same is true with investing. As a general rule, you will do better investing in a solid but unexciting company in a fast-growing industry than you would putting your money into a business with an exciting story in an industry that is going nowhere or is on the decline.

In short, I look for quality in making my stock investments. I look for the quality of the financials, of the management, of the products, and of customer relations. I want to invest in companies that have a proven growth strategy, a sufficient flow of cash, a commitment to employees, customers, and shareholders. And a company that plays a prominent role in an industry that is growing.

But quality is a subjective value. You can’t measure it. But you can measure the history of a company’s dividends, earnings, sales, and its status in its industry. These four metrics won’t insure success in stock investing, but for the typical pedestrian investor like me, they are a very good start.

“A good story is always more dazzling than a broken piece of truth.”

 – Diane Setterfield

When Considering Stock Investments, Don’t Trust the Stories 

Forty-five years ago, my partner came into my office, beaming with excitement.

“I know you don’t invest in stocks,” he said. “But let me tell you a story…”

Along with about a dozen other investment newsletter publishers and financial journalists, he had been invited down to some Latin American country – it might have been Costa Rica – to inspect a new technology. It was a mineral-processing machine, one that was able to extract gold dust from volcanic ash.

He was skeptical at first, he told me, but when he saw the machine operating with his own eyes, he immediately invested in the company that owned it.

First, he said, they listened to a presentation by a geologist who provided proof that there was gold content in the ash and explained how the extraction worked. Someone else, a professor of geology, provided a short history of past efforts to reclaim gold from sand and explained how this was different. And finally, they were taken to the site where it was all taking place, a fenced-off area near the ocean where the extractor had been installed. At one end of the machine, local workers were shoveling in volcanic-rich sand. At the other end, gold dust was being excreted. And if that wasn’t proof enough, an independent geologist was there to confirm the quality of the gold.

He could see from the expression on my face that I wasn’t buying it.

“Hey. I told you,” he said. “I saw it with my own eyes!”

“I’ll send you the reports,” he said, and stomped out of the room.

There is nothing that inspires us more than a good story. My partner’s disappointment with my reaction was an understandable response to his conviction. He had heard a story, one that seemed implausible, traveled all the way to Central America to check it out, and had concluded that it was legit. It was a bonanza! And I couldn’t see it! He was already counting the money he was going to make by investing in it. And he wanted me to be excited, too.

Despite my reluctance, he brought the story to a half-dozen investment writers that worked for us at the time. Some of them, like me, didn’t believe it. But some did. And one of them wrote about it in one of our publications. A few months later, the story was in the mainstream press. But not as a big discovery. It turned out to be a complete fraud.

The fraud was uncovered by a competitor of ours, a publisher who had also been invited down to witness the amazing machine… but he happened to be fluent in Spanish. And, as  he told me later, when he asked one of the workers how many hours a day he worked, the man said, “Oh, we only do this when the Gringos come into town.”

“Why didn’t you say something?” I asked him.

“Your partner really went for it,” he explained. “I didn’t want to hurt his feelings.”

Stories sell. The brokerage industry understands that. And that’s why, when you get a call from your typical stock broker, he will gloss over the facts in order to give you a full account of the story behind the stock.

There are actually three very common stories that stock promoters tell:

* The revolutionary technology: It might be a new kind of microchip or a cure for cancer. Stories about world-changing innovations are intrinsically compelling. Written well, they have the emotional impact of a good movie.

 * The soon-to-be-signed contract: Nothing great is going on with the company now, but they are about to make a deal with some huge, usually undisclosed, partner that will send their sales soaring… and, thus, the price of the stock.

 * The legend does it again: The company’s president or founder was “behind” one of the biggest growth stocks in the last 10 years. Now he is turning his attention to a new business that nobody knows about but you.

As a marketing advisor to the investment publishing industry for nearly 40 years, I know the power that such stories can have. My clients use stories to sell investment publications, and stockbrokers use them to sell stocks.

When you buy a financial magazine or newsletter that disappoints you, you can always get your money back. (At least you can with my clients.) But if you buy a stock based on a story and you don’t like it, you are stuck with what could be a very bad investment.

Stories are compelling, but know this: There is no correlation between the quality of a story and the quality of the investment it represents.

And that’s why, when it comes to investing, you should take a very skeptical view of stories. Rather than be swept away by a good story, ask questions – lots of questions – and buy in only based on the facts.

I slept and dreamt
that life was joy.
I awoke and saw
that life was duty.
I worked – and behold,
duty was joy.

– Rabindranath Tagore

Work, Hunger, Give

How to Enjoy Life in the Real World 

For some time now in America there has been a gradual rise of a sort of popular science of happiness that is fundamentally flawed.

It is epitomized in the bestselling book and movie Eat, Pray, Love. The book/movie, you may remember, is about a 34-year-old writer who suddenly becomes unhappy with her affluent life… decides it’s her husband’s fault… divorces him… and then spends a year in Italy (eating), India (praying), and Bali (recuperating?), where she finds what her life was lacking: a younger, handsomer, richer, and more exotic version of the man she divorced.

It’s a great title. But in terms of the idea behind it, it should have been called Live Like a Hedonist. Think Like a Fatalist. Act Like a Solipsist.

Hedonism, in the contemporary sense, is the idea that happiness comes from filling oneself with all the luxurious things life has to offer – gourmet food, fine wine, exotic experiences, etc.

Fatalism, to the modern mind, is represented in the adolescent notion that happiness can be achieved by finding one’s soul mate and discovering one’s passion.

Solipsism has infested itself into virtually every corner of popular modern psychology – the belief that happiness starts from taking the time to pay attention to and love oneself.

In Eat, Pray, Love – and a thousand TV shows, magazine articles, etc. – we are given blueprints on how to apply these ideas to rid ourselves of doubts and anxieties and bouts of depression and become our “best selves.”

We all know or have known people whose weltanschauung is filtered through these notions. They are called adolescents.

Adolescence is a stage of life where children move from 11 or 12 years of being cared for to adulthood, where they have to take care of themselves. Adolescence is mostly about the freedom to make mistakes and suffer the consequences. This is why, for most of us, adolescence is so painful.

But there are some for whom their teenage years are not painful, but graceful and easy. These are the “privileged” few whose parents, for whatever reason, have decided to continue to baby their babies forever.

This results in 20- and 30-year-olds that act like adolescents – spoiled, self-centered, and incapable of fending for themselves. You know them by the behaviors they exhibit:

* An extraordinary lack of self-awareness, leading to…

* An unconscious sense of entitlement about almost everything, leading to…

* Putting themselves at the head of every line…

* Inserting themselves in the midst of every conversation…

* Assuming that their problems are uniquely challenging and should be a grave concern for others.

Properly raised adults know that life doesn’t work that way. Having suffered through adolescence, they are able to move into the workforce, get married, and have children, with the realistic expectation that all of these experiences will be difficult.

Life, they have learned, is not meant to be an uninterrupted pleasure cruise. For those that have thought seriously about the matter, the central question is not how to best enjoy life, but rather how to get through it with the least amount of suffering.

This is, of course, a central tenet of Buddhism and an issue that has been dealt with by every important moral philosopher, starting with Aristotle.

For Albert Camus, for example, “to decide whether life is worth living is to answer the fundamental question of philosophy.” Every other question, he wrote in The Myth of Sisyphus, is “child’s play.”

For Rabindranath Tagore, life was a duty, an obligation – and happiness came as a result of  meeting that obligation. (See excerpt from one of his poems at the top.)

In Yes to Life: In Spite of Everything, Viktor Frankl, expanding on Tagore’s idea, noted that the happiness in life “cannot be pursued, cannot be ‘willed into being’ as joy; rather, it must arise spontaneously….  Happiness should not, must not, and can never be a goal, but only an outcome.”

Over many years of failing to achieve happiness through gluttony, hedonism, and fatalism, I’ve discovered what most of the moral philosophers have always said: Not only can happiness not be (in Frankl’s words) “willed into being,” it can only be achieved by focusing outside of the self.

What I’ve learned so far (and I’m still learning) is that there are three distinct types of activities that bring happiness without fail. Instead of Eat, Pray, Love, they are Work, Hunger, and Give.

Work

Instead of searching for the career that you are passionate about… or for some person or entity (such as the government) to end your suffering… get to work on doing something – anything – that is about someone or something other than you. Stop blaming fate for your troubles. Stop blaming others for your fate. Take responsibility for the person you are and the place you find yourself.

Forget all the things you hate about your job. Focus on doing a better job, on becoming a better worker, on working to make the lives of everyone you work with and for better.

Rather than spending your time complaining about all the ways you are victimized by society, work on improving the society you actually live in.

Hunger

This is a realization that came to me only recently. And it came from keeping a journal. I would read my journal from time to time for the particular purpose of discovering what sort of activities made me happy. One was practicing Jiu Jitsu. Another was reading a new book. A third was practicing the French horn. The common denominator was learning. I discovered that I am happy when I am learning.

Learning is the opposite of gluttony. Learning is a hunger for knowledge – a hunger to have new experiences and develop new skills. Feasting on things like food or comfort or luxury gives a momentary sense of pleasure that is inevitably followed by a longer period of physical and/or spiritual dullness and, often, by self-recriminations and regret. Feasting on learning brings continued and long-lasting pleasure.

Give

Instead of looking to be loved and to surround yourself with people that love you, look to give love to everyone around you.

Instead of always striving to increase your personal wealth, spend some time striving to give it away responsibly.

Instead of conniving to get the better of the hundreds of big and little negotiations in your life, use your smarts to make sure that the other person gets what he or she needs.

Do all of the above, and you will not only discover that you actually like what you do and who you are… you may even attract the person who ends up being your soulmate.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”  – Paul Samuelson

My Simple System for Knowing When to Buy a Stock

A reader wrote:

“I’ve read your strategy for buying income-producing real estate. You determine whether the asking price is fair or not with a simple formula: 8 times gross rent. What I want to know is if you have such a simple formula for determining the value of a particular stock, both for making the initial purchase and for reinvesting the dividends.”

Good question!

Determining a “fair” price for a dividend stock is a bit more complicated than it is when you are valuing income-producing real estate.

For one thing, businesses are more complex and dynamic than real estate properties. And the market in which rental properties exist tends to be local, which means easier to understand. Plus, rental income itself tends to be relatively stable. Rents can move up or down, but it happens gradually over a period of years, not months or even days, which can happen with stocks.

Using the 8 x GR (8 times gross rent) calculation makes it easy for me to know when not to buy. The only really bad rental property I bought in the last 15 years was the one I got talked into paying something like 15 times gross rent for.

There isn’t a calculation nearly this simple and accurate for deciding when to buy stocks. But there are ways to value stocks that are favored by people that do stock analysis for a living.

Two of the simplest are the P/E ratio and the P/R ratio. The P/E ratio compares the price of a company’s stock to that company’s profits (or earnings). The P/R ratio compares the price of a company’s stock to that of the company’s revenues.

The logic behind both is the same: If the company’s current ratio is higher than its historical average, it is deemed expensive. If it’s lower than its average, it’s deemed to be  selling at a discount.

Take Coca-Cola, for example. Its current P/E ratio is 28. This is 5 points higher than its P/E for the last 5 years (23) and 8 points higher than similar companies such as PepsiCo and Mondelez International (20).

A great time to buy Coke was (I’m not bragging) when I bought it, in 2015. Back then, it had a P/E ratio of only 20, which was, as you can see, relatively cheap.

Dan Ferris, editor of Extreme Value and a colleague of mine, did a study of Coke’s fluctuating values about a dozen years ago. I don’t remember the details, but I remember his conclusion: Even with a world-dominating brand like Coke, it does make a difference when you buy it. You should look to buy at or below its long-term value, whatever valuation method you use.

I rely primarily on the P/E ratio to value the “priciness” of a stock because of its simplicity and relative reliability. But I always ask Dominick, my broker, to take a deeper dive into evaluations when he thinks it’s merited.

Like using the GRM method for valuing rental real estate, using the P/E ratio for stocks can make it difficult or even impossible to buy more stock in good companies for years and years.

When the market is generally overpriced, P/E ratios are generally overpriced. And this is especially so when your portfolio consists of large, market dominating companies. There are times when you have to wait months or even years before the price of one of these great stocks comes into a safe buying range.

During these times, the cash portion of your stock account will get larger. You may be tempted to buy stock even if the P/E is high – especially if there are reasons to believe that the stock market or one of your stocks is going to move up.

When this happens, I sometimes ask Dominick if he can find any similarly large and dominating company that I don’t own and whose stock is NOT overvalued from a P/E perspective. If he can, we talk about whether it makes sense to expand the portfolio to include this extra stock.

There have been a few times when I’ve invested the cash in my stock account on some other type of investment – real estate, private equity, or private debt. But generally I’m comfortable sitting with cash since, because of how I diversify my portfolio, that cash is never more than 5% or 6% of my net investible wealth.

I’m not suggesting that this way of valuing stocks makes sense for everyone or even anyone reading this essay. I’m answering a good question by explaining what I do and have been doing for many years. So far, it’s been working well for me.

The Need for Speed

Some people are analytical. They tend to move slowly, crossing their t’s and dotting their i’s. Others are action-oriented. They tend to move quickly, impatient for solutions.

To grow a successful enterprise of any sort, you need both kinds of people. But in the early stages of growth, the fast movers need to take the lead.

There are good reasons for this that I discuss in some depth in Ready, Fire, Aim, my book on growing entrepreneurial businesses. But they all tie into one of my favorite themes: entropy. The moment you initiate forward progress, just about everything around you clicks into push-back mode. If you don’t press forward to accelerate your forward momentum, entropy will eat you up.

This is an easy concept for action-oriented leaders to understand. But what is sometimes not understood is that it’s never enough to do the pushing yourself. You must create a culture that supports it – a culture of Speed.

I was going to write a follow-up essay on this idea today, but then I saw the following from Craig Ballantyne, the man that took over Early to Rise as partner and editor-in-chief 10 years ago…

I just hosted another epic mastermind a couple weeks back… our best one yet, and attendees seemed to agree…

[There] was ONE common theme that kept emerging…

SPEED.

Whether it’s making a fast judgement call in order to quickly move to the next phase of your project…

Jumping on a market or idea quickly, thereby beating your competition to the punch…

Or just rapidly growing your business to reach your goals in less time…

Speed is so frequently the answer to your problems.

Craig then listed 3 “fast hacks,” as he calls them, to help his clients create a culture of speed when their businesses need it…

1. 1. Make sales your TOP priority 

This is one of the most important lessons from my mentor Mark Ford…

He impressed upon me that sales is the driving force of your business…

 Especially in the early stage.

Therefore…

You should spend 80% of your time driving sales and marketing efforts.

1. 2. Fail faster 

No matter how you slice it, failure is part of the process…

… another concept Ford addresses in his book Ready, Fire, Aim

(strongly suggested reading material)

And by accelerating failure, we also accelerate success.

However, failing faster alone is not enough.

We must be sure to learn from these mistakes in order to become more efficient over time.

An objective best served by:

1. 1. A)An attitude that it’s okay to fail.

Not the primary goal. But realizing it’s expected and okay when it happens.

1. 1. B) A culture of learning and open discussion of failed attempts.

For example…

Failed marketing attempts should be analyzed against successful ones to gain insights for future efforts.

1. 3. Get out of your head and into the game 

Stop questioning, second guessing, over analyzing, and essentially paralyzing yourself with perfectionism.

There’s a reason you’re where you are today, doing what you’re doing…

Trust yourself.

Stop driving with one foot on the brake and just do what you think is right…

You’ll find your instincts are often right.

And the wins you do get by seizing opportunities immediately will far outweigh the losses.

Plus if you do fail… (refer to #2)

So remember…

 When it comes to progress… SPEED is the answer. 

And through focused attention on seemingly simple ideas like these…

You’ll be able to scale your business in a fraction of the time you’d originally anticipated.