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Even in a World of Deleveraging... There Are Still Fortunes to Be Made
Graham's Note: This is an excerpt from my latest issue of Private Wealth Advisory in it,
As noted in yesterday’s article, the developed world will be entering a period of lower global growth for the following four reasons:
1) Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce.
2) Excessive debt overhang.
3) A return to more frugal “common sense” spending patterns in the developed world.
4) Political and Geopolitical uncertainty.
This backdrop is going to engender dramatic changes in the way people choose to spend their money. However, while the “across the board” perspective looks quite bleak, there are going to be truly outstanding opportunities for wealth creation available to those entrepreneurs and businesspeople who are able to think creatively.
The most critical aspects for all businesses going forward are:
1) Selling an experience, NOT a product.
2) Respecting your clients with the intention of building a long-term relationship with them.
3) Using innovation and creativity to navigate shortages of capital.
4) Passion, hard work, and determination.
Regarding #1, the days in which people will buy things simply for the sake of buying them are over. Having been to trade shows and other similar events since the Depression began, I always noted that those vendors who are offering a “widget” based solely on the idea that people have needed that widget before are going out of business.
However, those businesses that are attempting to create an experience for their clients, are finding that people are still willing to pay good money for something that has a strong emotional impact and/ or will provide them with memories.
I will give you a personal example from a dining experience I had in 2011.
Back in November 2011, my wife and I had dinner at Michel at Tyson’s Corner, one of the most recent restaurants opened by legendary French chef Michel Richard.
The food was exemplary, a kind of French-American bistro gone uber-gourmet. However, the highlight of the night was the “chicken” we had for dessert, one of Richard’s signature, whimsical dishes.
See for yourself.
This is a meringue, shaped like a hen, filled with luscious ice cream and sitting atop a nest of brittle sugar “straw,” whipped cream, and a pool of caramel syrup.
It was extraordinary. The combination of textures and tastes was beyond anything my wife or I had seen in a dessert. Adding to this explosion of flavors was the fun of eating “chicken” as a dessert food and this was possibly the most memorable dessert of our lives.
Indeed, this was more than just a dessert, it was a marketing tool for the restaurant as a whole: as soon as our order came out, every table around us ordered one too. By the time we left, I counted six other tables having “chicken” for dessert.
In plain terms, we ordered a dessert, but Chef Richard delivered an “experience.” My wife and I laughed and shared many delightful moments as we butchered our “chicken.” Because of this, I didn’t care that the dessert cost $12. In fact, I probably would have paid $17 or more for it and not even batted an eye.
Now, compare this to your average dessert (brownie, sundae, etc) at most restaurants. How often do you find yourself remembering a random dessert you had months ago? From a business perspective, how many times have you found every other table around you ordering a dessert after they see yours?
This is what I mean by selling an experience. It’s no longer about products, it’s about creating memories and emotional experiences that touch people. That’s where the money will be going forward.
I’ll give you another example.
At a recent dinner party I struck up a conversation with a young entrepreneur who had recently attained an MBA from Harvard. One of his classmates was Will Dean, a former British counter-terrorism agent who competed in marathons, triathlons and the like.
Dean was bored with the average fitness course, so he decided to launch Tough Mudder, a 10-12 mile fitness course that is based on the kind of courses and challenges he had to overcome during his training for the British Special forces (we’re talking about 12 foot walls, underground mud tunnels, etc).
The company’s entire start up cost was probably less than $50K: all they had to do was rent a track of land and build and dig the obstacles (walls, tunnels, etc.).
However, people all over the country have lined up in droves for the experience of pushing themselves to the limit at one of these events. The whole thing is like an enormous playground for adults. It challenges you physically, mentally, and emotionally.
And people are willing to pay north of $150 per pop to participate. Spectators have to pay $50 just to watch. Small wonder that the company made $2.2 million in revenues in its first year and $22 million in its second year. That’s $22 million in revenues, from a glorified fitness course, that was launched DURING the current Depression.
This is what I meant by innovation and creativity finding pockets of wealth. Will Dean saw a niche in the fitness industry (an event that was more challenging and less monotonous than traditional marathons and other fitness tests). He then moved to capitalize on that niche with minimal risk by keeping his start-up costs to a minimum. And today he’s sitting atop a $20 million business with numerous corporate sponsors.
You can learn more about Tough Mudder here:
http://toughmudder.com/
Dean’s story shows, in no uncertain terms, that if you’re able to think creatively about pre-existing industries, you can make an absolute fortune, even during times of severe economic contraction.
The above two examples concern generating value for entrepreneurs. My final story pertains to seeking out wealth generating opportunities from an investing standpoint.
The financial markets today are heavily if not completely reliant on Central Bank intervention. We now have a time in which virtually every traditional asset class under the sun is overvalued and susceptible to a crash (this is even true for Gold if we get another 2008 event).
With that in mind, investors are going to need to look outside of the capital markets for opportunities to generate returns. Indeed, I fully believe that performing assets (things like lead mines, shopping malls or wood mills) will potentially offer better returns than stocks for instance.
I’ll give you a final example.
A friend of mine is a master baker. Having trained both in the US and in France, he’s now at the level that Yale and other large organizations hire him as a consultant to design their breads and pastries.
Recently my friend told me that he had decided to launch a new bakery (he sold his last one several years ago). Given his reputation, skill, and earlier success (he’s run several very successful bakeries in the past) he would have little if any trouble raising capital for the business.
However, rather than seeking out loans from a bank or other financial entity that would want a claim on his private assets in return, he’s chosen to raise capital from private investors. And he’s offering a 10% yield on all loans.
This is a heck of a return relative to most savings accounts (0.15% at best) or even Treasuries (the 30-year yields less than 4%). And he’s only looking to need the money for 1-2 years before paying it back.
Thus we have a serial entrepreneur, with a nationally recognized talent, offering investors a 10% yield on loans made to fund his latest venture. Having seen his spreadsheets and projections, even by extremely conservative estimates his business should be producing close to $500K in EBITDA within the first three years.
As I said before, there are opportunities to generate value in the real economy today, outside of the volatile and manipulated capital markets. With that in mind, all investors should devote some time over the coming months to seeking out investments outside of what’s on Yahoo! Finance and CNBC. I fully believe some of the greatest opportunities available today will be in the real economy, NOT seen on a stock screen.
For more market insights as well as real world business ideas to create wealth in this current economic contraction, swing by www.gainspainscapital.com. We feature a number of free Special Reports that are designed to help investors navigate the capital markets safely and securely.
Graham Summers
Chief Market Strategist
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Man, some of these comments are negative nellie losers! Are most of you people hoping for financial armageddon? While you piss away your lives?
It's good to be informed as ZH does so well, but many commenters are downright depressing.
Me, I'm out earning more and more of those worthless FRNs, living a good life, but using those worthless FRNs to also be prepared for future trouble. Best of both worlds.
Go ahead and sit there and complain, create your own self fulfilling miserable destiny. As you sit there crying the sky is falling, I'll be out enjoying life AND getting prepared.
Warrior Dash is another similar to Tough Mudder, WD is easier(larger customer base). I did one in MN and they had literally thousands of people do it at 40-50 bucks a pop. Plus they charged 10 bucks parking for those thousands, parking in a farmers field. Most profitable crop he ever had.
So go ahead and sit there and knock down entrepreneurs. Those dumbass tough mudder guys will make a few million and be able to afford their own doomstead if they want while many of the loser posters on ZH (I LOVE ZH, don't get me wrong) sit there and waste their lives away and accomplish NOTHING.
Many of the loser posters on ZH are only using negative news as a piss poor excuse to NOT get up and do something with their lives.
Be informed (ZH is awesome!) but get the fuck up and do something to help yourself.
If everyone else is sooo dumb, then it should be EASY for you key'bored' brainiac warriors to excel in short order.
Put up or shut up.
Even Pink Floyd mocks you!
Fuck off
Die
Rot
and go to hell.
If you don't like ZH medicine, go to your doctor for Prozac.
hehe, right on cue. Truth hurts, eh?
business idea: buy serveral small hand guns. go to rich shopping area. wait til near closing..enter and say stick em up. your goods or your life. high roe. takes guts and get up and go. brains to do it and stay out of jail.
see to "live and die in LA"
How's that for an experience based business model?
I like it, be sure to franchise!
From the article:
"Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce."
Umm no, more people are NOT retiring as they are finding their savings deminish and having to work longer. HENCE fewer young people getting a chance to enter the workforce.
Starting a business in a depression? Oh yes, keep your chin up.
80 to 0% of all new businesses fail. Since all the real jobs are sent to chindia, anyrthing halfway sucessful will be quickly copied. So blaze the trail and let others profit. BTW 99% of all patents never make ANY money.
We are copying chindia who taught us to copy.
Get a license to steal ,like a govt. job, personal injury lawyer, some other business that can buy congressman.
I see honest real people buying franchises like "duct cleaning" or other quasi- legit business and laugh and cry for them/at them.
You can value add to 'the homeless experience' by selling Derilique by Mugatu and sleeping out on a city block with a shirt full of $100 bills to keep you warm.
On one hand, I like the article. We are facing a time when the intelligent and capable will have less opportunity to follow a traditional career path and will be required to look more to entrepreneurial efforts.
But I think your note on experience is exactly wrong. The value of experience is a holdover of the psychology of the credit bubble, where there is always some assumed level of income surplus to be spent on experience. I am not arguing that people are not willing to pay more for experience. They are, when their budget allows it. But it is not exactly a new iidea, and my argument would be that in a true Depressionary situation, where the consumer is forced to cut layer after layer of fat from their budget, experience will be an early victim.
You only have to realize how incongruous are the notions of a Depression and spending $150 to run in the mud. Unless you are championing the experience as a cheaper alternative to other more expensive experiences, I would argue that spending $150 to run in the mud is a desperate echo of a disappearing bubble psychology, and that as the Depression deepens and extends, people will increasingly realize they need that marginal $150 for necessities, not experiences.
There are good opportunities out there for non traditional investments. Receivables financing are paying 1-4% a month. Small/med biz are getting squeezed by large customers stretching payments and banks are puckered up on lines of credit. Enter receivables financing for 30-90 day terms. I've got a big chunk at work here. commonplace in latin ameria and europe.
Internet/mobile marketing and apps are big ROI w/ the right marketing and targeting. Focus on niches that have money. Call any company that pays several thousand a year for yellow pages and boom, you have a client.
It sucks hard enough that this guy gets to post his nonsense on ZH in the first place, but re-posting his amazing meringue chicken story is really just taking the piss.
Short and Sweet...
The Lost Decade (????10? Ushinawareta J?nen?) is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically.
Japanese policymakers tried a series of government economic stimulus programs and bank bailouts. A 2.4% budget surplus in 1991 turned to a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching 100%. In 1998, a $500 billion bank rescue plan was implemented to encourage bank lending and borrowing. The central bank also attempted to increase inflation (which devalues savings over time), to encourage consumer spending
Most Japanese companies began to replace their permanent work force with temporary workers who had no job security and fewer benefits, and these non-traditional employees now make up over a third of Japan’s labor force.
banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise." Schuman states that Japan's economy did not begin to recover until this practice had ended
IMHO
Some of the -ve comments are because the post calls for more active real world investing in business to get a return. The days of being a fat ass sitting infront a screen clicking buy and sell are dwindling away and it is time to get real. :( I'm screwed.
My co-worker brought her husband over from a foreign country and they immediately started up a little business. So far it has been growing at a decent clip and I'm quite proud of their accomplishments.
Get into that entrepreneurial sprit!
"And he’s offering a 10% yield on all loans.
This is a heck of a return relative to most savings accounts (0.15% at best) or even Treasuries (the 30-year yields less than 4%). And he’s only looking to need the money for 1-2 years before paying it back."
Why do people keep on comparing yields on businesses with a savings account? A 10% yield maybe good or bad depending on the risk that the investor is taking. It cannot be compared to a "Risk Free" rate. What rate are Greek bonds paying now?
What deleveraging?
Little pockets of wealth are ok, and chasing them is somewhat admirable in many ways,
but at this stage, chasing little pockets of wealth doesn't solve much.
At this stage, the promotion of little pockets of wealth feels uncomfortable.
But that's just me.
The capitalist mindset is good, until it isn't.
When the enabling foundation is in jeopardy, polluted and feasting on itself, there comes the time when chasing little pockets of wealth takes a back seat.
But no, and, here we are.
You know I was going to write a substantive respose but the fact is I've got emails to return, deals to cook and little pockets of weath to chase. Party on.
I agree. I much rather concentrate on the old and boring proven. Food never goes out of style. Many countries are seen an increase in the number of security guard companies. I much rather invest in that than in a french bakery for the rich.
As a designer, I definitely agree with you on "experience" marketing. I would add though, that people with this innovation-ability are going to do well no matter when or where, and the rest don't have the intuition & skill to come up with these types of ideas that resonate with the customer.
Graham, thanks for the thoughts and good points, I enjoyed it.
That was one of the dumbest posts ever, and I LIKE Graham's stuff!
I don't like Phoenix posts and I thought it was pretty good.
I fundamentally agree with his point: there is no more beta to be had in the public markets - and so if you're looking to build wealth, then you're going to have to expose yourself to idiosyncratic risk. You're going to have to earn your return by exploiting information asymmetry.
In plain English, you're going to have to take risks on individuals and their ideas, bone up, learn the businesses and take a view, and risk getting it wrong. This much is true.
It could have been better written, and I wouldn't lend that baker a dime unless that 10% note was also convertible into equity, had a term, a valuation cap, covenants on pay, etc. Bridge financing of some sort is typically done on a secured basis (even if the security is itself somewhat dodgy, like future receivables, etc). It sounds like it could be a typical angel investor deal. It better read like one or the dude is getting ripped off. I've seen a few "professional investors" believe their stock picking or capital structure arb mojo translates into seed funding expertise and get scammed. Seed funding is a practice: there is a set of customs and conventions, best practices, valuation metrics, etc. Ignorance is seldom profitable.
"Having seen his spreadsheets and projections, even by extremely conservative estimates his business should be producing close to $500K in EBITDA within the first three years." Yep, it's gear-ron-teed, 'cause the sell-side data is anointed by God and never wrong wrong. Should I just send all my available capital, or do I also need to show up with my pants down?
Newsflash: the "experience" of getting thoroughly reamed by a fast talker is as old as language itself. Go sell crazy somewhere else, we're all full up here.
I'm fairly certain that you're not really that dense. Are you?
Did you see any contact info? Any clues as to how you might invest even if you really really wanted to? Any suggestion, however subtle, that you should jump on this "investment?"
It's a story illustrating a point for godsake. Get a grip my man :p
Cheers!
GML
i had a creme caramel today in Geneva ...it was so yummy i had another ...then i got the bill... €9 Euro (each!)
it was a great "experience" Graham, one of the best tasting deserts ever ...i'll never go back
I think that you raise some interesting points on how to direct an investment portfolio. While I agree with your views that markets may be overvalued due to the irresponsible policies of the FED, direct equity or lending has its own risks. First, you would incur legal and financial costs to ensure that due diligence was performed before investing. Further, you would not to ensure the legal documentation would protect the investor. Second is the problem of being paid back. Small businesses have the ability to manipulate their books. An equity investor would be at risk. Are you going to insert restrictions on salaries, bonuses, asset sales etc.? To protect your investment you would need to insert yourself deep into the processes to ensure the owner was not lining his own pocket at your expense. Some of these same issues exist in lending. Covenants would have to be inserted to ensure assets were not improperly removed from the business, excess compensation paid etc. Then you would be at the mercy of the legal system to get your money back. Even if you obtain a judgment you need to collect on the judgment. This is not explained in law school and it can be devilishly difficult if a borrower is intent on hiding assets. Just some things to ponder. That is why banks have lending officers and large legal departments.
Well crap, that's all I do is make stuff no wonder im broke.
Well, slap a little meringue and a beak on your stuff. Apparently that makes for a memorable buying experience.
You all seem a bit jaded ... there was some good insight in this one.
I have had the same recurring moneymaking idea for years. Produce a bottled fragrance for men that smells like cash money. Call it Bux.."for when you ain't got the real thing". It would be a chick magnet experience, I think.
You've got your guaranteed first customer here in RobotTarder --- and he'll be needing a couple of gallons, at least.
is QE3 deleveraging? It looks like more levitation of risk assets!
I wonder if Phoenix capital believes in dyseconomics, and the alpha stock market explosion in a non inflationary spiral that QE3 will now bring to investor America? Its contrary to his bearish take.
TOday the bulls and bears are raring to go; for one its runaway banks running into wall; for the others its the great stock market boom as BRIC money feeds the QE pump and America's elitist progression. Ukon's law and wage decoupling from GDP, now that is something that cracks the economic mirror from side to side!
Wow. That sucked.
No shit.
"1) Selling an experience, NOT a product."
Lifestyle pimping that sells you to yourself... gee maybe some of the more creative among the unemployed can market "the homeless experience".
Does this mean that Phoenix is selling "the investment experience"? No fucking thanks, sparky.
I take advantage of Phoenix's columns to promote my blog! My latest article is "How Long (Can This Keep Going On...)?". Want to take a look? Then gmail me at my name, assure me you will behave, and I'll send you the link. I make people do this to minimize spammers and bots. I also write about gold and other stuff, don't miss the video of Molycorp's big-money construction (with nice music) to get their mine and rare earth processing facilities up to speed.
FUCK! Did it again! (Didn't see that it was Phoenix.)
Buy some puts and get rich quick!
same here, ugh double fuck.