Making Out Like a Bandit While Your Startup Burns

That’s what skewered shareholders are accusing of Theranos founder and CEO Elizabeth Holmes of doing.

Funny, this whole thing reminds me of that Futurama episode when Fry is convinced by a snazzy partner to launch a startup with all pizzazz and show and no actual substance. The goal of course is to angle for a buyout/cashout while eventually jilting the investors. This is really what Theranos has done.

Let’s look at the facts behind the situation:

  1. Elizabeth Holmes assembles a prestigious group of people more for their credential and connections than for actual talent and knowledge of the industry
  2. She dresses like and bills herself as the female Steve Jobs, leveraging her Stanford professor and school name
  3. The company says it has a secret technology that will disrupt and revolutionalize the lab testing industry (if this were real, the 800 lb gorillas like Medtronic, which is making continuous glucose monitors for diabetics, and Quest, which processes many lab specimens, would have jumped on it already and innovated themselves or bought the technology from Stanford)
  4. The company actually ran some specimens on Quest machines and sent the results on as their own
  5. Internal dissenters who warned and tried to whistleblow were fired, bought out, or otherwise silenced

What can we learn from this? Well, the company is likely bankrupt from shareholders and the FDA bombarding it with lawsuits. The stock is worthless. The big question that remains is whether Holmes gets to keep any of her salary and already cashed out stock, or if there’s some attempt to claw it back by shareholders. If the clawback is unsuccessful, this will set a precedent for future entrepreneurs that selling the idea is more important than having an actual product.

So go ahead and try it at home. Craft a pitch of a zany idea backed by data that makes it plausible. Hype it up, attract investors, grow the userbase (easy to do in tech) or hire enough big name people to generate enough buzz, and then cash out or sell out.

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Is Social Media Conducive to Success?

I’m shaking my head at young kids these days, stuck on their phones, obtaining (and believing) all their information from the internet and social media, regardless of how authoritative the sources. At times, I feel like an old fart, stuck with dialup and landline phones, grumbling about the decline of Usenet and email, and not yet adopting the new technology.

But really, more often than not, social media makes you dumb. It’s a time waster where friends tempt you seemingly glamorous lifestyles, which are in reality carefully cultivated slices of their life. Being exposed to those things can lead to depression and endless peer competition. By focusing too much on the virtual life, we lose track of reality. Tangible things like reading, studying, exercising, and connecting with people in the real world become lost. We lose motivation and don’t spend time doing productive things.

However, given the large audience base, it’s unavoidable for big companies to have a presence on social media. This also applies to small businesses that we start, where viral marketing can really enhance growth. After all, who can turn down free advertising.

The best balance that I’ve found is to have accounts on Facebook and Twitter, and have them be driven by bots. Automatically post articles and such on these sites, automatically add people, accept all friend requests/follows, but minimize the temptation of actually personally opening the app or site to send messages to others.

Maybe if enough people adopt this strategy, the entire Twitterverse will be filled with bots spamming other bots!

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Newsflash: Clickbait Beats Real News

So much for making an honest buck the old fashioned way. Teenagers in Macedonia have cashed in on the Trump craze by creating sensationalist but false news articles and then sharing them virally on social media. By all accounts, this was a lucrative arrangement, with some top performers grossing $10,000 per month from AdSense revenue.

From the perspective of the educated elite, it can be disheartening that people are dumber than before, so much so that they believe what they read. For these people, the more outrageous the news, the more clicks and donations are generated. Real news by contrast just doesn’t have the same appeal.

However, on this site here we are politically agnostic. So what’s the take home message from the success of fake news? Sensationalism sells (by generating clicks and eyeballs, and get shared virally due to the outrage they generate). In contrast, bland and boring rarely gets one very far. You know what else sells? Sex. Just take a look at the average Yahoo news article. A cursory glance at the sidebar shows the following ads:

  • She Hid the Truth Until This Photo Appeared (black/white photo of a half naked actress)
  • She Didn’t Notice And The Fans Began to Cheer (photo of skimpy female sports player on the ground)
  • McKayla Maroney is Completely Unrecognizeable Today (photo of young gymnast smiling)
  • United Airlines Furious After Crew Revealed This (flattering angle shot of smiling flight attendant, emphasizing her smile, figures, and tights)
  • Jim Cramer: Homeowners Must Move Fast On Rebate (photo of a shrugging Jim Cramer)
  • It May Be the End of Social Security (RIP tombstone of Social Security)
  • Federal “Mortgage Payback” Goes Into Effect Today (businessman in a suit)

The overriding theme is: how to make easy money, pictures of skimpy women, and threats of easy money being taken away. Empirically, this is what the audience is interested in. Does this erode trust in institutions and authority? Are businesses promoting bad behaviour by appealing to base instincts, or are they simply catering to their customers? You decide.

Regardless of your opinion on the ethics of this type of advertising, the conclusion that we may draw here is that targeted sensationalist messaging can really enhance revenue. As the successful fake news sites can attest, this can be a self-contained business idea in itself. For example, if you’re unscrupulous, you can start a website (for very low cost) aimed at exposing the truth behind prescription drugs and how natural remedies are so much better. Then write fake news articles with studies showing how ___ vitamin beats a common prescription drug for ___ common diagnosis. You can throw in there a few snippets or quotes from prestigious doctors. Then add another article about how there is a mainstream medical conspiracy trying to cover up these cheap cures. Then advertise with sensationalist message on Yahoo (so desperate for revenue they are that they can’t afford to cut off clickbait, unlike Google and Facebook).

Shifting gears, if we want to be a bit more ethical, we can still adopt this style of marketing but still maintain our integrity by posting well-researched articles grounded in reality. Look at the most successful personal finance bloggers and travel bloggers out there today:

  • Young Adventuress – young attractive female living life of leisure
  • Mr Money Mustache – outrageous claims of financial independence early
  • Legal Nomads – young attractive female living life of leisure
  • Nomadic Matt – I live a leisurely life of travel at a young age, and you can too

All of them employ clickbait tactics in some aspect. The female bloggers may not realize it, but the fact that they are young attractive females contributes significantly to their readership.

The technique is yours. Whether you use it for good or ill is up to you.

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Can You Pay Taxes Like Donald Trump?

Donald Trump’s 1995 tax return revelations are all over the news. Some think it’s a smart play, while others think are incredulous that he can get away with paying so little. I’m not here to judge morality or try to sway you with respect to politics. Instead, there are things we can learn from the man in how to structure our own taxes so that we can only pay as much as we’re legally required to, as many defend him for doing. Many of these tips are covered in detail in my book, if you’re interested.

  1. Earn your income from capital gains and dividends, rather than from wages. Working doesn’t pay anymore. Returns from existing wealth and investments are taxed at much lower rates, with a cap of 15-20%, with a surcharge for high earners. Oh, there are no payroll taxes charged on investment income.
  2. Write off “business” expenses and losses and take advantage of generous categorizations of housing depreciation as losses. Offset as much business income with expenses and deductions as possible.
  3. Take advantage of legal tax shelters like IRAs and 401ks. In this category I would also include HSAs and 527 plans. Remember that if you’re self-employed, you can shelter up to $53,000 in income rather than the $18,000 401k limit.
  4. Use the backdoor Roth. I’ve written about it before.

Lest you forget, Mitt Romney used these very tricks to pay a 14% income tax. To do the same, you have to earn your money in the same fashion and from the same sources as these billionaires.

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Another One Bites The Dust

Another hedge fund, that is. Despite the market being up more than 200% since the depths of the financial crisis, some hedge fund managers have somehow managed their billions of investments into the ground.

Richard Perry will shutter his hedge-fund firm after billions of dollars in investment losses and client defections.

The longtime hedge-fund manager told clients in a letter Monday “the industry and market headwinds against us have been strong, and the timing for success in our positions too unpredictable.”

Perry’s eponymous firm has lost more than 60% of its assets under management since November 2014, when it managed $10.4 billion. Its main fund lost more than 12% last year, much of it from a bad bet on Fannie Mae and Freddie Mac, and was down 1.3% this year through August, said a person familiar with the matter.

Perry won’t give back all of the remaining money immediately. He committed in the letter only to returning “a substantial amount of the fund’s capital” starting next month. Some of the remainder won’t be cashed out for more than a year, the letter said. Bloomberg News earlier reported Perry’s shutdown plans.

Ahem, notice how he excuses his own poor actions by claiming that headwinds arrayed against him were too strong, even though the overall market was up. Also note that he doesn’t have plans to return all the investors’ money. Why would anyone pay these guys in the first place, given this kind of performance?

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Compromising Values for Profit

If you want to stay true to your morals and values, stay small. That’s the lesson from Nate Silver’s successful FiveThirtyEight blog/platform for election predictions.

There may also be a second major issue with FiveThirtyEight, which we will describe as one of economy. We start this part of the discussion by noting that every one of us who is writing about politics this year benefits from a horse race. “Things are the same as they were yesterday” is not a story. “Clinton extends her lead” and “Trump makes up ground on Clinton” are. Similarly, we also benefit from finding things that are new and different to talk about. Sen. Bernie Sanders (I-VT) and his rallies tended to get relatively little media coverage; not because of any particular bias against him, but because they were all the same. You can only write, “10,000 young, mostly white people show up to cheer Sanders” so many times. Hillary Clinton, evenhanded and cautious as she is, also tends to give us relatively little to talk about much of the time. With Donald Trump, on the other hand, it’s several new and outrageous and previously unheard of things almost every day. Hence his dominance of the headlines.

Point is, all the political sites have a certain bias towards “dog bites man.” However, there is reason to believe the bias is unusually strong for Silver and his crew. Many political sites and prognosticators—NBC News, the Wall Street Journal, Fox News, Bloomberg Politics—are part of organizations for whom political coverage is part of their core mission. Others—Sabato’s Crystal Ball, the Harvard Political Review—are part of (and are supported by) universities. Still others—HuffPo, Breitbart, Politico, The Hill—are already stable, self-sustaining businesses. And a few—this site, Sam Wang’s Princeton Election Consortium—are side projects of academics who already have day jobs. The point is that while we all like page views and clicks, none of these sites is—as far as we know—facing an immediate existential crisis. Page views could go up or down by 50%, and most or all of the above would keep on trucking.

In short, the article accuses Nate Silver of selling out for money rather than maintain purity of form with insightful and articulate wonky coverage of elections. This is why the most profitable ads that you see on sidebars of major sites are Outbrain specials with outrageous sounding taglines like: “The cameraman kept rolling when she did this” and a picture of a half naked woman. Or how about, “You won’t believe what Donald Trump’s daughter looks like now.” Unfortunately for humanity, insightful blogs like this one and Marginal Revolution can only hope to get half the number of clicks and views, because we cater to the intelligentsia rather than to the lowest common denominator.

Unfortunately, the business mantra of know your audience and know your customer apply to online as well. Just like in the real world, sex, celebrities, and controversy are what draw customers and eyeballs. Eventually, in order to make money, businesses have to bow to reality and cater to this crowd. The alternative to retain control is to remain small and niche (and by extension less profitable), without an overlord or owner to dictate content based on productivity.

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A Profitable Protected Franchise

Surprised to know how profitable auto dealership are? So was I.

Franchise laws include prohibiting manufacturers from terminating existing dealers without “good  cause,” requiring the manufacturers to sell through franchised dealers, and protecting dealers from competition by awarding exclusive territories.

These laws favor the dealers so much that when General Motors GM, -0.22% eliminated its Oldsmobile brand it coughed up $1 billion to compensate dealers, and still couldn’t avoid becoming embroiled in lawsuits. Adding to the dealers’ advantage, some states make it illegal to circumvent the dealers by selling cars online.

Dealers are profitable even when manufacturers are floundering because the dealers make money on servicing old cars and selling used ones. One reason servicing cars is so lucrative is because dealers mark up parts by as much as 80%. For example, a dealer may charge $1,800 for a turbocharger that costs around $1,000. So the dealer pockets $800 before adding labor expenses.

Yeah, there’s a reason Warren Buffett wants to get into this business. When you generate a big proportion of state sales tax revenue, you have incredible leverage to get your favoured bills through to protect your business, at the expense of the average man. How can the rest of us avoid paying tax to this cartel? Move to a place with better public transportation and never drive again.

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New Media vs Old Media

Just read this article about ESPN and how it’s contributing to a drag on Disney’s bottom line. Funny thing is that for the last decade, it was a major profit guzzler while Disney’s other divisions were dragging it down. But now, due to cord cutting and gradual aging of people used to paying for cable, ESPN is finding that even live sports can’t hold the attention of the masses. Their viewership is declining relentlessly.

What should you do when there are fundamental technological changes destroying your customer base? Adapt and disrupt yourself before someone or something else dose. What specifically can the cable giants do? Move their operations online, where more and more consumers are. Rely on advertising or charge minimal paywalls (like HBO) for gated access to premium content. Hulu is a viable medium for archived episodes, while Youtube can stream live shows. Accept lower profits for higher market share in a dwindling industry. Are they likely to implement these changes? Doubtful. Large businesses are by nature conservative, and CEOs are more likely to be fired for rocking the boat than by riding a dying business model to the grave.

Coincidentally, another example of an industry that’s facing rapid technological change is that of computer chips. Whether it’s Intel, AMD, or Nvidia, they’re finding that fewer people have need to upgrade their computer and buy faster chips. We’re so far from being bottlenecked by the CPU today, while we get much more bang for the buck by upgrading the RAM, hard drive to SSD, or broadband internet speed. So what are these chip makers to do when people are slowing the upgrade cycle and some opting out by relying on mobile devices? They go on a quest to find a new must have product or technology that requires more computing power. Gaming was historically the big driver over the last few years, but the next big advance that everyone is betting on is virtual reality.

Herein is an opportunity for up and coming developers or aspiring entrepreneurs. Just like the mobile revolution unleashed a market for gaming apps, so can talented programmers plan for creating worlds in VR. One need that I’ve identified – creating a simulation program for surgery trainees to practice doing surgery, with all the unanticipated complications along the way. It will take a major team of programmers, visual designers, and surgeons to create, but it has the potential to revolutionize how surgery training is done.

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To Make Money in Real Estate, Follow Millennials

One big theme I harp on is that the new demographic bulge of millennials reaching adulthood (their peak spending years) will drive the success or failure of companies. Those who can adapt and cater to changing tastes stand to do well, while other who fail or cling to dying cohorts will be relegated to the dustbins of history.

Real estate has been one of the things on my mind in recent days, and it is without a doubt that millennials are influencing how future communities and properties are designed. Take this for instance:

“What millennials want are places that have a vibrancy, where you … can shop, go out to bars, walk, and bike,” says Lynn Richards, president and CEO of the Congress for the New Urbanism, a Chicago-based advocacy group for more pedestrian-friendly neighborhoods.

(…)

“For a very long time we built up our towns and villages and cities to drive” in, says transportation consultant David Fields with San Francisco–based Nelson/Nygaard Consulting Associates, adding that even drivers like to park their cars and walk around. “People ultimately want choice.” He says demand for biking-accessible communities is currently the highest he has ever seen.

Developers are taking note. Communities in the suburbs that chose to design for driving (I’m looking at you, Orange County) will suffer in the future as the new generations choose to live in walkable high-density places with plenty of amenities. This means that forward-looking cities like Portland, Denver, Austin, and Vancouver will reap the rewards (and they are, in terms of skyrocketing real estate prices)

As the article notes:

Developers and builders are taking note. They are offering bike storage facilities, valet, repair service, and even wash stations in fancy apartment and condo buildings to lure younger buyers and renters.

Crescent Communities, which builds subdivisions, homes, and apartment buildings across the Southeast, looks for cities and towns whose streets are lined with sidewalks and dedicated bike paths.

That’s because the No. 1 thing potential buyers of all ages want in their communities is walkability, the builder learned through surveys it conducts regularly. So Crescent looks for communities that already have those amenities in place to which it can link up its new buildings and developments.

While those hot areas are already expensive now, they may still have room to grow. What’s more rewarding is to look for communities that are still relatively affordable but which have the potential to be the next “hot” city where millennials flock to. I like to look for college towns close to large cities with good public transportation, a fun pub culture, and close to the outdoors (or at least with biking trails and green spaces).

Some potentials:

  • Fort Collins, CO
  • Madison, WI
  • Asheville, NC
  • Salt Lake City, UT
  • Bend, OR
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Millennials Just Hustling to Survive

One big theme in my book is how everyone, especially millennials, have found ways to compensate for the rise in living costs without a corresponding increase in wages. One big way to do this is unfortunately to work a side job. Traditionally, this was limited to low-wage service industry workers. I remember hearing stories from my patients waking up at 4 AM to drive to work in Los Angeles from the outer suburbs, only to return in the evening and work a second shift at a local restaurant. Mind you, all this is to just cover the bills – it isn’t even about making extra spending money.

This practice has now slowly but surely engulfed millennials, many of whom are recent graduates from university who can’t find any meaningful well-paying work in their fields. Many of them choose to monetize hobbies. As the article describes:

The 31-year-old Torontonian makes adult Sailor Moon outfits and sells them on Facebook, a gig she estimates brings in about $800 a month on top of what she earns in her full-time position at a mascot manufacturer.

(…)

Covering everything from teaching English over Skype to driving an Uber, the term has even found its way into Urban Dictionary, where it’s defined as “sideline that brings in cash.”

It’s a tough time out there. Regardless of whether extra money is a need or a bonus, you can monetize your talents in one of these ways. See more details on side gigs in my book on wealth, as well as ways to turn your hobbies into highly profitable businesses.

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