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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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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Disrupt Yourself in a Declining Industry

A friend sent me this article about the plight of the diamond industry, namely that they can’t appeal to millennials.

This is a frequent problem faced by many different industries, who have failed to adjust to changing consumer tastes. This is why a favourite Silicon Valley expression is: “disrupt yourself or be disrupted”. Namely, stay ahead of the curve, innovate, and shape consumer preference rather than be the laggard clinging to a dying product.

One great story of adaptation that I’ve seen is with Nvidia. They saw many years ahead of time that the market for PC graphics cards was in decline (due to consoles and lack of new groundbreaking games). As a result, they leveraged their expertise into the burgeoning field of mobile device SOCs (chips and chipset). This became a smashing success. By licensing the underlying technology and IP from ARM, Nvidia’s top chip engineers (from their graphics side) could fine tune the SOC to be more power-efficient and powerful than the competition’s.

What if you’re in resource extraction like coal or oil, threatened by the next generation of clean energy? Why not disrupt yourself by investing money in those technologies? That way you can dominate the new industry even while your old products become obsolete.

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What is the Goal of Your Business?

A friend sent me this article about the future of entrepreneurism in the world. In short, the central thesis is that the giant companies are entrenched in their industries, and it’s harder to compete with them given their incumbent status. Thus, it’s far better to stay small, keep costs low (the key theme in my book!) and make “subsistence” level wages that replace a day job. For example, a local plumbing business is like this. At most, it may grow into a handful of employees and service the surrounding cities, but it doesn’t want to scale up and become a national presence (is there even a comparable national business that provides plumbing?). That’s too much investment, hassle, work, and time before the eventual payoff. That’s not to mention the bureaucratic headaches in providing benefits to employees, building up marketing, HR, and legal departments. In the face of this, it’s quite logical that many a business owner is quite comfortable pocketing $200,000-$1 million in yearly profits from operating a small business.

Side thought: this is a workable theme for a business concept. Uber’s premise is that it provides a single app that links service providers (taxi) to customers anywhere in the world. One could argue that independent taxi drivers and companies could have preempted Uber’s rise by banding together and making an easy to use and interoperable app. In any case, we can extend this concept by applying it to things like plumbing services. Imagine if you can access a worldwide network of plumbers at your call on the app, without having to fumble through the local Yellow Pages.

Going back to building a successful business these days, the alternative is to be high growth and low profit and eventually cash out in a sale to one of the big boys. Threaten them enough with disruption and then whisper into their ear that it’s better to head off a rival early with a manageable buyout than to face the loss of their entire business. Facebook did this to Instagram, paying a high price but preserving their business model. This is arguably easier to do in the fast-moving world of tech than in other industries.

Ultimately, is it a bad thing that so many businesses are now focused on the modest goals of profitability and sustainability? I’d argue no. For many people, there’s no need to grow big. Having fun, creating something, and being mildly profitable is surely enough to live a comfortable life.

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Inspiring Business Ideas – Self Employed Specialty Consultant

Today I stumbled upon an interesting post by a medical resident on a specialty site for medical education. She describes how she has been able to charge an obscenely high rate of $388 per hour for her tutoring services. Here are the key excerpts (typos included as written):

I started tutoring at 10 years old. I tutored for free initially. It was fun for me. I love the moments when the “light bulb goes on” in my peers. I find learning so much more interesting when other people’s welfare in addition to my own depended on how well I learned. I guess that was an early sign that medicine would appeal to me. I relish the challenge and the privilege of someone else’s well-being weighing on my shoulder. It somehow made what I do more meaningful than if I were to just do it solely for myself.

Then in 10th grade, I started charging $10/hr for tutoring AP sciences. I loved it. I was the favorite of teachers & parents, many of whom confided in me all their worries about their kids’s academic performance and future prospects. I felt that not only was I helping the student acing AP tests, but also I was somehow part of their household harmony.

I continued to tutor in college. I worked for tutoring companies at first. Ecstatic at the pay raise, $23/hr, when I saw the newspaper ad. Only to learn that I was to drive to students’ home, in Bay Area traffic, pay for gas and maintenance for my car, foot the occasional car accident bills because I was so tired and distracted trying to find new students’ houses all over Bay area.

It came down to about $5/hr of my time, way worst then when I was my own boss in high school, when it was a solid $10/hr plus I had free rides, free food, and made my own schedule. The worst thing in working for others (tutoring companies) was to learn that my students paid my boss $65/hr while I got $5/hr.

Then I said to myself, “screw this. I’m not going to let some talker business man eat off my back when I’m doing all the hard work.” So I quit all my jobs where I was not my own boss. I put my credentials, experiences, tutoring results, student testimonials, & CV on craigslist. Before long, I was getting tutoring requests left and right at $23/hr, with students coming to where I am (so no driving, no getting lost, no parking tickets, no car accidents). I tutored the hours I wanted; I made the curriculum myself.

Shortly after my craigslist advertisement went up, I could not keep up with the demand of tutoring requests. So I said to myself, instead of working like a dog to fulfill every tutoring request, I’m going to raise my hourly rate, until I can comfortably satisfy the demand & still take care of my other responsibilities and still go out with my friends and have a life.

I continued to tutor because I love teaching and being my own boss. After Mini was born, students came straight to my house, paid me $100/hr, and were so understanding towards my role as a mother that I could put Mini in a front sleeper/carrier and tutor at the same time.

Did I say I love being my own boss?

I continued to tutor throughout medical school and into residency, as I take on more responsibilities in my medical training, & Mini demands more intellectual engagement, I had fewer & fewer hours allotted to tutoring. Yet, I still had lots of demands… more than I could fill.

So I kept increasing my hourly rate, to the peak of $420/hr while still in California. Now, I’m perfectly content with the equilibrium price of $388 for the past 2 years.

It’s an interesting read because of how she independently discovered the advantages of being a self-employed niche consultant, as described in my book. Let’s see which principles she recognized and applied.

  • Scale: It doesn’t have to grow too big. Actually, being too big becomes a hassle to manage. Instead of doing the work that was initially interesting, the owner eventually transitions into managing employees, inventory, and crunching numbers as an accountant.
  • Exit strategy: Going along with the previous point, she started out with a firm a goal for her earnings – to supplement her income from her day job, provide some welcome distraction, monetize a hobby, and not work too many hours at the same time.
  • Price adjustment: If there’s anything you should take away from this article, this is the point. Many times business owners starting out are unsure of how to price. One way is to price at the market median (look around at competitor prices), provide exceptional quality, and titrate the price upwards as the number of customers grow. This is especially key if you don’t want to scale up and up such that the company exceeds the ability of one person to manage.
  • Focus on your expertise: Her business was in specialty tutoring. While anyone can bill themselves as a tutor, she had exceptional and unique credentials that she could leverage into higher income. Imagine how much you could earn as a dedicated nanny+tutor to the children of the privileged wealthy, if you had a degree in medicine from an Ivy League plus a masters in early childhood education!

As a side note, the UC system is taking the price adjustment technique to heart. They have a simultaneous problem of a revenue shortfall and too many international and out of state students rousing the ire of Californians. They are implementing the best solution for this, which is to raise prices for those students, maximizing revenue and decreasing their numbers at the same time. It’s a win win for the system!

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Should You Consider Uber (As a Gig)?

Of my group of childhood friends growing up in the Bay, all of us went into different careers. Some became bankers, some doctors, and others techies. However, there was one who dropped out of school and worked random retail jobs. That is, until he found Uber. He fell in love with it because it was easier work that paid more than his previous jobs. There’s also a degree of respectability and cachet that comes along with being an Uber driver that’s not there as a waiter or grocery store stocker.

So should you consider a job as an Uber driver? I would argue no. The most in-depth analysis of how much Uber drivers really take home was done here. I paste the kicker here:

Without including other real weekly expenses such as gas, car maintenance (or accounting for depreciation of the car), I found that the average net income per hour for the eight drivers was $21.90, roughly 10 dollars per hour less than the combined hourly wage from the raw Uber data.

(…)

However, if we assume an average weighted driver wage of $21.90 per hour, which factors in just a fraction of driver expenses, and assume drivers work 30 hours a week (again, not necessarily typical, but a middle range of the hours worked by the eight drivers we spoke to), we can assume a rough projected yearly driver salary of $34,164.

That $21.90 figure may even be undercounting the true cost of gas and maintenance. You see, sharing platforms like Uber are inherently exploitative. By counting all drivers as independent contractors and issuing them 1099s, Uber is not responsible for payroll tax, benefits, and other hard-won legal protection that apply to ordinary employees. By being self-employed, Uber drivers have to pay both the employer and employee sides of Social Security payroll tax. That’s a whopping 15.3% on the first $100k or so of income. Then factor in paying for health insurance out of pocket and you can see how the same $50k in gross income from Uber isn’t the same as $50k from a W-2 job, much less than $50k from qualified stock dividends.

Then there’s the unreliability of cash flow. As a business, the Uber driver can easily have days or months with low utilization and income that’s not enough to pay the bills.

We haven’t even gotten to the subject of tips, which Uber recently begrudgingly legitimized in a settlement with its drivers, in exchange for being able to keep them as independent contractors. Unfortunately, we don’t know how this change will turn out. Uber riders loved the hassle-free nature of payment, so adding the uncertainty of whether and how much to tip will definitely degrade that experience. As a driver, it’s an anxiety-inducing dilemma. Should you set a low rate and hope to rake in tips, at the cost of potentially bad reviews, or try to stand out by advertising yourself as a more expensive but hassle and tip-free experience? What’s worse is that Uber hasn’t taken an official stance on tips, preferring instead to slide it under the table by allowing it but still discouraging it as routine policy.

If driving for Uber really were an attractive gig, we should expect to find many workers flocking there, which would increase competition and drive down the wage for everyone. No wonder that Uber is aggressively promoting itself… as a place to work. This commentator from Naked Capitalism notes anecdotally:

There’s something very curious going on with Uber, apart from the obvious, well-publicized weirdness: they’re advertising like crazy on the radio, both national and locally here in San Francisco (I don’t know if they advertise in other local markets). That in itself is hardly remarkable. What is remarkable is what they’re advertising. They’re not advertising their service. They’re advertising for drivers. Think about it. When has a company ever paid to advertise in mass media for workers? I think the reason is obvious. If the gig was profitable to the drivers, and there was a reasonable retention rate, they would have no need to advertise in mass media. But as we know, the pay sucks, especially when vehicle costs are factored in, and the attrition rate is atrocious.

Rather than think about working for Uber as a contractor, we should strive to understand the fundamentals of its success and how we can apply the same lessons to our own business ventures. As I wrote in my book, a good modern business in the internet age is capital-light. Uber checks this box for sure. Part of its genius is that all it really is is a low-cost platform for the exchange of goods and services. It takes a small cut and provides nothing more than a matchmaking service and slick UI. It’s ingenious as a business plan – almost foolproof due to its simplicity and lack of capital expenditures.

Uber is also insanely scalable. That is, they don’t need to change their core business model or significantly increase expenses just because they’re growing larger. By leveraging contractors anywhere in the world, they just need to keep the central platform running and fresh-looking. Contractors will automatically do all the hard work and make business decisions appropriate for local markets, laws, and customs. It’s capitalism broken down to the microscopic level.

The dark side of Uber, which may very well be its downfall, is that it outsources safety standards and consumer protection/insurance requirements to its contracted drivers, most of whom do *not* comply with minimum regulations that apply to taxi drivers. Of course, actual enforcement of local state and county laws is impossible given how many small fry drivers there are. How can taxis compete trying to play by the rules?

Think about it this way. If Uber were subject to the same standards that apply to taxis, in terms of insurance and safety standards, they would probably be just as expensive. Otherwise, Uber is really not all that innovative. A large taxi company could just as easily put together an easy to use app for mobile devices and mimic the same function.

Sooner or later, the law will catch up and start regulating Uber. All it takes is a major accident leading to death or disability and a major lawsuit. Perhaps Uber’s true business model should be to rake in money and plan on cashing out and shutting the service down while the going is still good.

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Inspiring Business Ideas – Etiquette Classes

This post is part of a series of business ideas that come to me in the course of everyday life. Some of them are in areas I have experience and expertise in, while others will be more off-the-wall. I will comment briefly on the skeleton structure, how to get started, overall viability, and projected payoff. If you like it, feel free to take it and run with it.

It’s been said that a good entrepreneur meets needs, but a great one anticipates them. Indeed, being the first to exploit (or perhaps start) a trend is a great way to get a jump on becoming the big fish in a new market. Such was the approach of a certain Sara Jane Ho.

She certainly has an impeccable resume, having graduated from Harvard Business School and working a few years as an investment banker (one of the featured “good jobs” in my book). But suppose that she realized along the way that working for someone else would never make her rich, and that the long hours would ruin her health and sanity before long. Thus, she looked inwards trying to think of what she could do with her skills.

Mainland Chinese, thanks the the conditioning after the Cultural Revolution, have two distinct traits. Having lost their distinct culture, they came to worship money, especially after the country opened up to foreign investment and started adopting capitalist ways. They also have an inferiority complex, having been under the thumb of foreign oppressors for the past 400 years in recent history (until after WWII). It’s no wonder that they are aspirational, trying to adopt the ways and mannerisms of their previous overlords.

Taking advantage of this yearning, Sara Jane Ho started a business teaching culture and class to the nouveau riche of China. This includes social graces, table manners, and being a consummate host.

Let’s count the number of reasons why this is a great business idea, using principles from my book.

  1. The business combines her unique skills. She’s fluent in Chinese, understands Chinese needs, but has also grown up and gone to school in America. She’s therefore the perfect credible intermediary to bring western mores to Chinese.
  2. Startup costs are low. It doesn’t cost much to run a series of seminars and workshops. Most of her costs are probably related to advertising, and even those will recede as her business becomes more popular through word of mouth.
  3. She can charge premium dollars to a captive audience. This is one of the big advantages of creating a business that caters to the rich.

 

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Jobs That Pay – Dog Walking

Hey, not all traditional jobs are poorly-paid and overworked. As I mentioned in my book on wealth, there are under-exploited niches where one can be successful as an entrepreneur. Marketwatch today ran an interesting article on a dog walker(!!!) who is raking in 6 figures working the equivalent of part-time.

Stewart says he could have grown his business into “a dog walking empire.” But he says “there’s a tipping point — where you manage people more and dogs less — and that’s not what I signed up for.”

He now has three employees who walk dogs for him, and he doesn’t plan to hire any more. He pays them a salary instead of an hourly wage and often works with them.

He charges customers $15 per walk — the going rate in Long Island City — and walks between 40 and 50 dogs every Monday through Friday, mostly between 11:30 a.m. and 3:30 p.m.

He knows a solo dog walker in his neighborhood who makes $2,000 a week by working 35 to 40 hours a week. And he knows a dog walker with employees who makes $150,000 after paying his employees.

And Stewart says he makes about $110,000 a year — after paying his expenses and employees — while working 25 hours a week. “It’s full-time time pay for part-time work. I think everyone would want that,” he says, adding, “I’m doing something that I love and I have time to go to school at night.”

I’ve bolded key points of emphasis. This guy has done a great job following the rules in my book for starting up successful businesses.

  1. He understood the market. NYC folks are busy and are willing to hire nannies, dog walkers, etc. to take care of their personal lives.
  2. This is a small enough market (not a lot of prestige for dog-walkers) that someone can easily become super specialized and command top dollar (big fish in a small pond).
  3. He figured out how to stand out as elite, by promoting his expertise and experience with dogs of all kinds.
  4. His work was still paid on an hourly basis, but he removed part of those constraints by hiring others for some jobs and moving to more of a higher level coordinating, marketing, and managing role.
  5. He had limited ambitions. He kept his business small-scale enough to be adequately profitable, rather than investing tons of money to become a commercial empire, with a higher chance of losing money and even failing.
  6. He worked on what he knew and loved.
  7. At least initially, he didn’t depend on his job for money (he worked as a bartender and waiter for a while).
  8. He knew himself and had an endgame plan. He had an income level in mind at which he would be satisfied and spend extra hours on other pursuits.

One natural wacky extension of this principle that comes to mind is being a niche nanny-tutor combo to the very wealthy. Someone can bill himself as an Aristotle-like individual able to give kids the extra boost needed to get into the most elite schools, become well-rounded, and achieve success in life. For a high retainer of course! If you’re gunning for this position from early on in life, you can build a sample CV with a PhD in early childhood development, a bachelors or masters in education, empathy and skill with children (being female helps in this regard, for perception if nothing else), aptitude in art and music, and a track record of success (by babysitting and caring for family friends’ kids).

You can read about of other successful entrepreneurs and more tips on how to identify your strengths and build your own business with my book on wealth.

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