Tag: business

Gamestonk

2020 was a rough year. That goes without saying. It was hard to find motivation in writing a blog about Quitting Your Job when so many people were losing their jobs and seeking unemployment assistance. Their jobs quit them. So I watched and waited, trying to find that spark for inspiration to return to the blog-space.

Then came The Big Meme Short.

Because this event is playing out better than any movie that came out in 2020, we’ll take it one step at a time. It will also be partially subjective, because I “took part” so to speak, buying into the market — more for the experience than in any attempt to actually make money. Personally, I believe in investing and do so. I believe in acquiring assets and utilizing dividends (read my post on building a dividend ladder portfolio here). I bought up stocks in April last year and did well. What happened this week was not sane investing and I don’t recommend getting involved (it’s not over as of this writing) and if you do please exercise caution.

That being said: I am not an investing professional or hold any certifications or fancy paperwork that shows I’m a qualified analyst or that you should listen to me. Trade accordingly and consult a financial professional!

Prologue

Beware the average man the average woman…

Charles Bukowski “The Genius of the Crowd”

GameStop had been mentioned in investing circles over the past year, primarily because of Dr. Michael Burry taking a sizable position. Burry, if you didn’t know, was one of the prime movers of The Big Short (played by Christian Bale) and one of the first to bet against housing. As of June 2020, his fund, Scion, owned 4.26% of available GameStop (GME) shares. Fast forward to this past Monday, where Burry’s position of 1.7 million shares rose to $271 million — and that wasn’t even GME’s weekly high.

Meanwhile, on the other side of the internet, subreddit r/wallstreetbets, essentially a stock trading club of retail investors who discuss stock market strategies, was turning into an angry beehive. It’s worth noting that around the time the GME play got going, the subreddit had about 2.2 million subscribers. It is now up to 5.7 million ‘degenerates.’ Having lost large amounts of money in previous market plays to the big guys on Wall Street, the…shall we say, collective…of wallstreetbets came across the perfect target for revenge.

It involved shorts (I’ll try to keep this brief, but some context is needed). Yes, the same as Burry’s The Big Short. A short is simply a bet against a stock or asset. ‘To short’ something is to bet against. That’s the general term which comes from a ‘short selling’ action where you sell a stock short. An investor on the street can do this by borrowing shares from their brokerage, selling them immediately at market price, collecting the money as profit but owing the brokerage the shares.

Example: I short sell 100 shares of Big Company stock at $10/share. I collect $1,000, but I owe my brokerage (Fidelity, E-Trade, Schwab, etc) 100 shares of Big Company. The stock goes to $5/share, I buy 100 shares of Big Company and return them to the brokerage. I sold for $1,000 and bought back for $500, a difference of $500 which I keep as profit. Brokerage gets their shares back, the trade is over.

Shorting can be dangerous. Imagine if I sold Big Company shares at $10/share and it went to $15/share. Now I’m OUT all the profit AND still owe my brokerage the shares. In most cases, if the trade goes against you, the brokerage will demand their shares back (cause they’re losing money on the value increasing, this is called a margin call). They could also have the power to start selling other stocks in your account to buy back the shares you owe them.

Shorting is a common tactic on Wall Street; it’s done by big banks and hedge funds all the time. The ugly part of it is that with so much weight and money behind it, these funds can actually move the price of stocks in the direction they want them to go. Imagine being able to short Big Company stock and short so much of it it drives the price down in your favor (this is because of volume; when sellers outnumber buyers, the price goes down and vice versa).

So back to r/wallstreetbets. What they discovered was that GameStop (GME) was shorted by Wall Street by over 140%. What does that mean? It means GME stock was heavily bet — the number of shares shorted OUTNUMBERED the amount of available shares. And, if you remember from the example above, the shorted shares must be re-bought to close the position. So, ipso facto, there wasn’t enough shares available to close the position. When the trade was due to close on Friday, January 29, 2021 (last trading day of the month), Melvin Capital, and the other funds behind the short, would need to buy shares to close the short.

As anyone who invests knows, the law of supply and demand rules.

Part One: Short Squeeze

I don’t know when the move to buy up GME started exactly. From the stock chart, the first big move was January 13, where volume spiked and the price rose sharply. For the purposes of this post, we’ll start there.

r/wallstreetbets was at a mere 2.2 million followers or so, but had garnered full buy-in from it’s members on the GameStop play. The price started to climb, more joined in. By the end of last week, I was seeing news about GameStop and ‘short squeeze’ in my news feed, but didn’t bother to look into it.

A ‘short squeeze’ occurs when the price of shorted stock suddenly and sharply rises. In order to ‘stop the bleeding’ (e.g., stop taking losses) a trader or hedge fund will begin to buy the stock back to fulfill the short trade. This, of course, causes the stock to continue to rise because the short seller has started buying too, and it feeds off itself. Stock rises, short seller buys to cover before the price goes up further, which causes the price to rise more, which causes the short seller to buy back more…et cetera.

To use my earlier example of shorting Big Company stock. I borrowed 100 shares and sold at $10, expecting it to go down. Instead, say it goes down to $6 but then starts to come back up. Panicked (and not wanting to lose my profit), I buy 25 shares at $6 — which adds to the increase in price. I still owe my broker 75 shares and the price is rising. So I buy 25 more shares at $8, still owing 50 and my profit is shrinking fast… If it goes to $10, I lose profit on my remaining 50 shares and if it keeps going over $10 I’m losing money. The phenomenon of the price rising against my short and me adding to it is a short squeeze: I’m the one getting squeezed.

I first checked the price of GameStock (GME) on Tuesday at the market open, finding it at about $143/share. My first response was “this is absurd,” the company is in no way worth that. This is a stock that back in October was under $10/share and their business model wasn’t very forward thinking (brick and mortar as games moved online). I checked the stock chart of GME:

At this point, I still had no idea r/wallstreetbets was behind it or what was even going on. From a chart and price perspective, this just looked like a pure mania play. The RSI (relative strength index), the green blob in the top right corner, showed 98+ which means the stock is white hot and severely overbought. My first instinct was to bet against the move using puts.

First: Why bet against it? The reasoning is that it continues to take more money to push a stock price up. Someone (or some fund) must be willing to buy at the current price. In order to sustain huge price gains, there must always be another buyer. The minute no one wants to buy a stock at a certain price, the selloff begins. This is what happened with the dot com crash and any subsequent crash of a stock or market after parabolic moves. I had played a similar trade back in April 2011 in silver:

In late April 2011, silver had climbed to incredibly high levels very quickly. The RSI was high and I knew it couldn’t stay up forever. I bought puts on SLV and within a week the price of silver collapsed. Most money I ever made trading in a day. So, to me, it looked like a similar setup for GME.

I went to make my trade in my Fidelity account but found I wasn’t registered to trade options (my silver play was done in an E-Trade account I’ve since abandoned). I applied, but had to wait at least three days. So, with no trade to make that day, I decided to research exactly what was going on — would I still get a chance to buy puts later in the week? Would the stock mania still be going? So I started to dig.

And I realized something incredible was happening.

Part Two: Can’t Stop. Won’t Stop. GameStop.

It turns out that the story behind GameStop’s ridiculous rise wasn’t the typical ‘rumor mill’ drive up found in past stock manias (remember JDS Uniphase?). It wasn’t a case of “Blue Horseshoe Loves GameStop.” It was a grassroots movement to ‘strike back’ against a faceless enemy in the Wall Street hedge fund. Resentment towards Wall Street for the 2008 housing crash was channeled now into this new play.

What savvy users like /DeepFuckingValue, Roaring Kitty, and r/wallstreetbets discovered was that the big players were extremely exposed on GameStop stock and would be required to buy it at any price. They could create an extremely painful (and expensive) short squeeze against the hedge funds shorting the stock, particularly Melvin Capital. So word was spread, and the degenerates of r/wallstreetstock began to buy GME stock. More importantly, they didn’t just buy — the message was to HOLD.

They would buy up as many shares as they could get their hands on and deny them to the hedge funds. Then they would get their friends, family, and anyone who would listen, to buy and hold too. Because GME was shorted over 140%, more shares were needed to cover than were available, so denying ANY shares further would make things exponentially more painful. Supply and Demand was on full display as GME price rose.

As the price climbed, the redditors’ strategy appeared validated. The truth is, it was a smart play. They caught Melvin with their pants down. Why such a huge short play on GME? I don’t exactly know; GME had a been the target of short plays over the past two years. Maybe Wall Street knew they were a weak target whose stock price could be easily pushed down, particularly with GameStop closing their stores during the pandemic last year. A more insidious theory would suggest Melvin and others wanted to short GME to zero, folding the company and not having to buy back ANY shares, thus keeping 100% of their profit. Regardless, GME’s price was starting to “moon” as it climbed faster.

By Tuesday I noticed the stock and its chart. The grassroots movement was working. Profits garnered interest in what was going on. Interest prompted more buyers — but for the redditors it wasn’t necessarily to get rich, it was to be part of the experience. The GME play had gone viral…like a meme. GME was the first “memestock.” The real memes was also appearing.

When the pandemic started in 2020, lockdowns began and people on the street found themselves stuck at home, receiving stimulus checks and $600 Federal unemployment bonuses. With nothing else to do and/or no work, many took to the retail trading platforms Robinhood and M1 Finance. According to the NY Times, in the first three months of 2020, Robinhood “users traded nine times as many shares as E-Trade customers, and 40 times as many as Charles Schwab customers,” and according to CNBC, retail brokers in 2020 saw “record new account openings…despite the pandemic.” Credit where credit is due: Robinhood and M1 Finance and their $0 commission fee for trading helped force other larger brokers to compete, like Charles Schwab and Fidelity, and drop their commission to $0 as well.

These new retail investors moved like a swarm in 2020, charging after hot name stocks like Tesla (TSLA). The GameStop phenomenon presented itself as the next big target to buy. r/wallstreetbets (now up to 7 million followers in the second day of writing this post) would soon attract these millions of new street investors to their cause. Together, they pushed GameStop up to dizzying heights.

By Wednesday, GME was over $300 and Michael Burry — up 1,500% on the rally — was now calling the GameStop price rocket “unnatural” and “insane.”

Then something else began to happen. r/wallstreetbets continued to dig and found heavy short positions on other stocks too (just not has hefty as GME). From highshortinterest.com here (as of the end of the week of January 25th) the stocks with the highest short interest (GME lower than the 140% originally, down to 121% which means some shares were bought to cover some of the short):

On Wednesday I decided to enter the fold, just for fun. I had no plans to dive into GME stock head first and my options trading still hadn’t been approved by Fidelity (and still no word). For my own entertainment, I chose AMC stock — I love movies and it seemed an interesting play. It hadn’t rocketed up quite like GME did and maybe it would. I got to play a company related to movie and feel like part of this cultural event.

Someone clearly wasn’t happy with r/wallstreetbets. By Wednesday afternoon the subreddit was knocked out of commission, going ‘private’ and not being available to anyone who visited. Even further, the WallStreetBets Discord channel was banned outright. The subreddit would appear public again late Wednesday evening or early Thursday morning, but to this date, the Discord server is still gone. Was this a co-ordinated attack? There’s no doubt at this point WSB was pissing off powers that be.

I would personally experience the coming “fuckery” first hand the following day. It would also validate my original thesis on why GME was a good put choice back on Tuesday (again, before I knew anything about r/wallstreetbets involvement). As if things couldn’t get any wilder, Elon Musk tweeted that day just after market close, driving the price up even more with foreign investors:

Part Three: The House Always Wins…Or Does It?

On Wednesday I was in the game. There were struggles out of the gate; most major brokers were suffering delays in filling orders, likely due to heavy volume. At Tuesday’s close, AMC was just over $6. By pre-market, it had climbed over $12. I was able to finally get my trade through after the bell at 9:30am at $16.50. On Wednesday AMC climbed and closed at $19.90. News came out after the closing bell that Melvin Capital and Citron had exited their short (after getting absolutely leveled). The amount lost by these two hedge funds has varied in the news — Melvin Capital has supposedly lost $7 billion, 53% of their assets under management. GME was over $340/share and the trade was moving in the direction the Redditors planned. Wednesday evening, investing commentary site ZeroHedge reported “Hedge Funds Are Puking Longs to Cover Short-Squeeze Losses.” “Puking longs” means hedge funds are selling long positions to get cash to cover losses incurred due to losses caused by the short squeeze. This is what being margin called looks like.

On Thursday morning, the pre-market price of AMC hit $22. GME was up over $400. Both had been pushed up overnight by foreign traders in India and Europe. North America was getting ready for the next round of the fight when something I’ve never seen before happened.

Brokerages began to restrict only buying not selling. In fact, users were reporting Robinhood (and TD Ameritrade) had REMOVED the buy button for certain equities, namely GME and AMC.

So for all the “meme stocks” (e.g., the heavily shorted stocks pointed out by WSB), Robinhood and TDA were not allowing their users to buy. Promptly, the price on these stocks began to fall. With the retail traders shut out en masse, the sellers would overwhelm the buyers. My shares of AMC were down to $12 when the market opened, wiping out over $7/share in profit. GME price took it on the chin.

Robinhood was blasted across social media for the restrictions, prompting many to suggest alternatives. A Change.org petition appeared to remove Robinhood from the App Store. “How to delete Robinhood” was quickly trending on Google later that day as well. Protestors appeared in-person on Wall Street to demanding that “Robinhood has got to go.”

Robinhood was claiming they were restricting the stock purchases to protect themselves AND their investors. What it looked like was Robinhood was trying to prevent the dreaded failure to deliver (FTD) that would destroy Robinhood and its capital investors. By failing to deliver, they open themselves up to lawsuits and bankruptcy. By restricting purchases, it helps protect against FTD, but the PR damage was total. RH was a accused of being complicit with the hedge funds to help cover their GME shorts. If retail investors couldn’t buy and only sell, it helped drive down the GME price for the hedge funds to recover. In addition, only being able to sell and not buy might cause panic to the retail investor to get OUT of their Robinhood account, making them hit the “sell” button, thus driving the price lower.

Anyway, at this point I could see the severe shenanigans going on. AMC dropped to the $8 range and I was in the red in my tiny position. I debated just holding and waiting. Then I noticed that every time AMC started to climb back up, the price would halt. Somebody was enacting a trading halt on AMC and GME; I counted no less than 10 halts on the price of AMC before noon alone. Something was happening. After some debate, and the price climbing back to $10/share, I got out. I could have held — I thought about it — but I didn’t like the manipulation and dark forces at work. I took the loss and I’m totally fine with it. It was fun to play and dip my toe into this cultural event.

But Robinhood preventing people from buying shares of GME or AMC was only half of the situation. According to several RH users, the app was also selling their GameStock without their permission. Robinhood later denied this had happened, but users took to social media to share screenshots showing the confirmations their accounts had executed sell orders:

One redditor, Palidor206, described everything happening with Robinhood as such:

And meanwhile…

Part 4: Welcome to Thunderdome

This is a long post, so let’s recap:

  1. Savvy Redditors and a YouTube identified an exploitable play on short sellers of GameStock (GME) shares. They began buying up shares and holding, which encouraged others. The price of GME began to climb.
  2. Early this week GME climbed over $140/share and the number followers of the subreddit r/wallstreetbets exploded. On Wednesday at market open, brokers (including my own, Fidelity) lagged and struggled to keep up with volume.
  3. On Thursday, Robinhood and TD Ameritrade began restricting purchases of the ‘meme stocks’ — GME, AMC, NAKD, BB, NOK, etc. At first the buy button for these stocks was removed; eventually users were restricted to only 1 share. The sell button was always available.
  4. Public backlash at Robinhood exploded, with people protesting and flooding the App Store with 1-star reviews of the app (which Google later removed 100,000 of)

On Friday, although Robinhood restricted purchasing, GME price was back up. AMC was back up (dammit). Nokia (NOK) and BlackBerry (BB) either didn’t have the same force behind them or truly were just a meme as they slid, apparently due to lack of interest.

By this point, the emotions behind this retail investor flood went far beyond greed. Followers of r/wallstreetbets began sharing personal stories of why they were doing this. To them, it was personal. They remembered 2008 and what the hedge funds had done to their friends and family. It was payback. Braveheart memes abounded. Perhaps most fascinating about this whole thing was that many of these investors were on suicide missions: it didn’t matter if they made money or if they lost it all. They just wanted to make the hedge funds hurt.

Here’s the story of Space-Peanut on reddit (which has since been removed by a reddit mod, but is available here)

Here’s another one from chickenweng65:

These people don’t care if they lose everything. They don’t care if GME goes to $0. To the reddit investor this is war. They don’t care if it crashes everything down. It’s a new form of populist revolt. As Space-Peanut put it, “Taking money from me won’t hurt me, because I don’t value it at all. I’ll burn it all down just to spite them.”

It’s like being in a gunfight with Doc Holliday — he’s not afraid to take a bullet because you’d just be doing him a favor.

By the way, while writing this, r/wallstreetbets is now up to 7.5 million ‘degenerates.’

The redditors with new found money are now using it to taunt Wall Street publicly.

5. You Are Here

GME is at a mania pitch. The memes are coming hard and fast. There’s reason to think there’s some panic on Wall Street, or at least concern for the chain reaction caused by the Robinhood debacle. See, on Wall Street, everything is interconnected. Brokerages deal with banks and clearing houses. You buy and sell stock in your broker account and it seems instant, but a lot of time it takes days to settle or ‘clear.’ Worst of all, perhaps, is no one knows how deep things can go from one short squeeze.

It’s Sunday afternoon and markets will open in a few hours. What will tomorrow bring? Will GME continue its meteoric rise? Where will the reddit ‘hive-mind’ turn to next? This event with not be without consequence — hedge funds will probably need bailed out. Expect government regulatory commissions and investigations. Will things reach 2008 levels again?

Maybe. Who knows?

WSB has kicked over a rock, exposing what was beneath it. Then they picked up the rock and threw it at a bees’ nest. I expect WSB to be demonized by the media and ‘powers that be.’ These market distortions are they’re fault, after all. If only they had left GME alone this wouldn’t have happened.

What does all this have to do with Quitting Your Job? This blog is certainly not advocating jumping on a bandwagon or chasing the herd for profit. But the biggest takeaway here is the old Boy Scout maxim of “Always Be Prepared.” Weeks ago redditors found a great stock market play. Who knows when the next one will arrive. That also applies in the event the market crashes; if you’re ready, stocks or assets can be bought for cheap while everyone is selling. The other thing I see happening in r/wallstreetbets and Twitter is people on the street becoming interested in financial education — how the stock market works, how stock is traded, what terms mean what. They’re a long way from being savvy, but the interest and desire to learn more is there.

I’m still out on all these meme stocks. But I’m bingewatching the show and it’s fascinating.

Disclaimer: I do not own any of the stocks mentioned in this post. I do not hold GME. I also do not use Robinhood. Caveat emptor.

On Coronavirus

These germs of disease have taken toll of humanity since the beginning of things–taken toll of our prehuman ancestors since life began here. But by virtue of this natural selection of our kind we have developed resisting power; to no germs do we succumb without a struggle…

H.G. Wells “War of the Worlds”

Updated Edit: I started this post when COVID-19 was first hitting U.S. shores. So much has changed in four weeks and there’s been so much news it’s been a struggle to keep up. However, with each passing day I was increasingly sure the below is true. I intended this to be a much larger article as well, but the deluge of information is going to cause me to break some of the segments out into their own blog posts.

Our world has changed. Not from terrorism. Not from the results of this election year. But from one of the smallest creatures in nature. At less than 50 nanometers in size, COVID-19 proves that even the smallest thing can make the greatest impact. In a few weeks, its presence was felt already on a global scale; here in the U.S., it’s only been the matter of a week and much has changed.

This blog post is important because I feel like we’re at a watershed moment. Just a few weeks ago, the stock market was at its all-time high. Everything felt business-as-normal. We were deep into an election cycle, with non-stop new and critique about the Democratic candidate for President of the United States. There were also still sports.

Now, we’re looking at entirely different country (or even world). It’s starting to feel like a science fiction movie: closed borders and travel bans, closed tourist locations, churches, restaurants, and schools. People have to stay away from each other. The way we work has been forced to change (more on this below). There are also plenty of unintended consequences, mainly economic ones. The U.S. stock market has been decimated; fear runs amok with heavy selling, with days of heavy buying dispersed in between. It’s an economic whipsaw, panic expressed in red and green numbers day in and day out — no one knows whether to buy or sell. Officially, the U.S. stock market has entered a bear market, suffering the fastest 25% drop in history. To many, this feels like the end of the world.

But there’s something interesting here.

This feels like a watershed moment. Things are going to change, regardless of how this plays out. We are living through history at this very moment. Much will be reevaluated in the coming weeks and months and below is just a sample.

Economic Damage

The economic ramifications cannot be downplayed. The U.S. market has suffered heavy selling as people bail out of stocks. Initially, it began as a result of downgrading the outlooks of large companies due to the shutdown of Chinese manufacturing. Factories in China and South Korea have been shuttered for over a month, and are struggling to restart. The length of closing is or will lead to shortages are less product are being manufactured — and many, many global companies rely on them. The disruption of supply chains has led to lower sales, which began pushing stock prices down. Selling begat selling, and then it turned into a rout.

Worse than a battered 401k or fund balance sheet is how the Federal Reserve has reacted. A few weeks ago, the Fed tried to get in front of the selling by cutting the benchmark federal funds lending rate by 50 basis points (bpts). Simply put, lowering the funds rate makes it “cheaper” for banks to borrow money from the Fed (the lending rate is the interest rate banks pay back to the Fed for borrowing; so if the funds rate is 1%, a bank could borrow money from the Fed at 1% and lend it out at 3% and make 2% profit). Last night, on March 15, the Fed lowered the lending rate to the 0% range. This means banks can borrow from the Fed essentially for free. If that weren’t enough, the Fed also fired up a $700 billion quantitative easing program — which it will use to buy up U.S. Treasuries and mortgage-backed securities (remember those?)

In a nutshell, the Federal Reserve is flooding the economy with fresh money to try and stave off recession. Its primary weapon is the federal funds lending rate — which dictates how “expensive” it is to borrow money. This new rate and QE program have effectively made the dollar “cheap,” and could have severe impacts on the value of our currency. In a black hole of selling, deflation sets in — prices drop, cash is in high demand, and businesses penny-pinch. What would could ultimately have is inflation — or hyperinflation — and severely damage our currency’s purchasing power. The U.S. Dollar is the de facto global reserve, with all other currencies pegged to it (there’s not enough time to go into all this now) and ramifications would be global if it suffers in value.

The economic effects of coronavirus are certainly being felt on a local level as well. In Ohio and Pittsburgh, bars and restaurants are forced to stop accepting patrons, and offer takeout or delivery only. This devastates waitresses and servers who live on tips. Venues and conventions are cancelled:

Pittsburgh Mayor Bill Peduto said the city will adhere to advice from the Centers of Disease Control and will lower the maximum occupancy levels of all events from 250 to 50 individuals. Today, Allegheny County Executive Rich Fitzgerald also urged non-essential businesses, like bars, gyms, theaters, child-care centers, golf clubs, and hair salons, should close or implement alternative work strategies for the next two weeks starting March 16, to help stop the spread of coronavirus.

Even if these places stay open, they may see very little or no patronage. Sales will go down. The service industry is going to suffer. In Portland, my brother-in-law drives for Uber. The amount of rides request for him has fallen off a cliff — no one wants to ride share for fear of contamination. The lack of Uber rides has him looking for Amazon Flex deliveries, but there are way too many Amazon drivers now because they also drive for Uber and have no rides.

Even Hollywood has felt the pain. Tentpole films have been delayed, new films have had their productions frozen or shelved, and no one’s going to the movies right now. Early estimates by The Hollywood Reporter indicate losses by the movie biz to be as high as $20 billion. Travel bans and Tom Hanks’ getting sick have completely upended tinseltown and there’s a scramble to maintain business; in TV broadcast schedules are disrupted by delayed productions and production halts on new pilots. Shows may not be ready or finished in time. And then there’s the question of insurance for the industry (from the same HR article):

Meanwhile, it is unclear any of the losses will be covered by insurance. “If we are talking in terms of protecting lost revenue due to enforced shutdown or scale-down of operations, some property policies may offer limited amounts of coverage, although many have specific communicable diseases exclusions,” said attorney John Tomlinson, who specializes in insurance and risk management law.

Movie theaters across the U.S. have closed down, with the chain AMC Theaters now possibly never re-opening. There’s also talk of bankruptcy for the theater chain. To attempt to draw some sort of revenue, studios have begun putting new releases online. According to CBS News:

Temporary theater closures could lead to permanent change in the industry. Wedbush securities analyst Daniel Ives, who covers the technology sector, said coronavirus could usher in a new era of consumer behavior that puts some theaters out of business for good. “For the first time since we launched coverage of the exhibition industry, we think the industry is genuinely at risk. There is valid concern that COVID-19 will limit theatrical attendance globally, whether driven by theater closures, capacity limitations, or fear of contamination,” he said in a research note. 

With schools and numerous businesses closed, parents and children are all relying on streaming services for entertainment. If it goes on long enough and Hollywood is willing to put new releases online to rent, there could be a large shakeout of theater chains. Will theaters reopen only to have some eventually close permanently if audiences don’t return? A discussion I saw among filmmakers on Twitter were theorizing the return of the drive-in theater, as it would allow moviegoers the ability to maintain ‘social distancing’ between cars. As a filmmaker myself, I plan to dive further into the future of the entertainment industry in a future post.

The most brutal consequences come from the stock market, where the Dow Jones has lost 30% of its value in only 3 weeks, out-doing the carnage from the 2008 crash. Retirement plans and pension funds have been decimated as the market has turned into “sell everything as quick as possible.” The market can’t determine valuations with manufacturing in China shut down, supply lines strained or cut, and businesses reducing hours or shutting their doors.

What this amounts to is the great tree of the economy is being shaken much like it did in 2008. Healthy or resourceful businesses will survive. Those at risk financially or have been teetering will be wiped out.

Globalization

The decades-long grand experiment of Globalization may end with the COVID-19 pandemic. The active concept of free-trade, open borders, and centralized manufacturing has been put to the ultimate test. There has always been great risk in China owning much of the world’s manufacturing, given their geopolitical and cultural standing. And I’m not even talking about Communism.

In 2018, China owned more than a quarter of all manufacturing in the world, far ahead of the U.S. in second place. If something were to happen there, the world would be severely disrupted. There have been ‘head fakes’ in the past 20 years — SARS, avian flu, swine flu (H1N1) — diseases originating in China, where pollution is heavy, sanitation can be lacking, and population is dense. I can speak for this first hand — I’ve been to Southern China provinces on business trips to factories. On several trips, coworkers came down with illnesses and/or food poisoning (I don’t eat seafood, and wonder if that’s why I didn’t get sick). These past illnesses should have been cause for concern that the world’s manufacturing hub was at constant risk.

Now, with coronavirus, much (if not all) of these factories are shuttered in the fight with the virus. There are shortages and other countries economies are impacted. Tech companies like Apple (or Samsung, with factories in South Korea) have had their supply lines severely disrupted. Apple is the poster child for Globalization: materials are sourced from around Asia; iPhone components (like the display) are built in Japan before being shipped to China for iPhone assembly. With manufacturing spread across borders, coronavirus is the ultimate perfect storm to cause chaos. In an article titled “Coronavirus: Globalists May Soon Become an Extinct Species,” author A. Gary Shilling writes:

The coronavirus’s disruption of supply chains not only unhinges U.S. imports but also raises national security concerns. China is the world’s biggest supplier of active pharmaceutical ingredients and the Indian generic drug industry, which the Food and Drug Administration says supplies 40% of U.S. generic drugs, relies on China for most of its active ingredients. Even after the virus scare subsides, look for more pressure from Washington for more reliable sources of goods, among other protectionist measures. Domestic producers will benefit but so too will those in Mexico. The results will be lower global efficiency and slower economic growth.

To wit, Japan has already begun urging the migration of their companies out of China altogether. From Bloomberg news:

That has renewed talk of Japanese firms reducing their reliance on China as a manufacturing base. The government’s panel on future investment last month discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia.

Another component vastly disrupted by the disease is open borders. “The impact is especially palpable within the 27 countries of the European Union, which has long been governed by a central belief that economies and societies are most dynamic when people and goods are able to move freely across borders,” writes Peter Goodman in a March 5 article in the NY Times titled “A Global Outbreak is Fueling the Backlash to Globalization.” After long refusing the close their borders — maintaining their allegiance to open borders and mass migration — the EU finally caved on March 17 to close the exterior border of the EU. Before that even happened, Europe was already in the middle of a migration crisis. There were concerns over open borders, with mass immigration coming from the Middle East and Africa, many were refugees from war torn Syria. Countries in the EU like Hungary had already closed up access while others continue to absorb scores of foreigners.

What happens to the flood of refugees and immigrants headed to the EU and find the borders closed? At the beginning of the month, Turkey said it was opening the flood gates for migrants into the European continent, with Greece countering that it was suspending asylum and stationing troops. According to the New York Times, both moves are illegal under EU law and “International protocols on the protection of refugees, of which Greece is a signatory, also prohibit such policies.”

The EU could possibly collapse as well, as the virus puts serious strains on inter-member trade relations regarding protective medical gear. France and Germany essentially hoarded their protective gear, denying other member states. France, in particular, “requisitioned all current and future stocks of protective masks.”

It’s not just Europe, either. The U.S. has announced an international travel ban — no one comes in or out. Borders with Canada have been closed. “Non-essential travel” between U.S. and Mexico has also been shut down.

So how does Globalization survive with restricted borders, international blame for the virus spreading, and crippled cross-border supply chains? At the very least, Globalization will be rethought when this is over. Some countries may use it as an excuse to break free of the EU or bring more manufacturing home to their countries. Reliance on unfettered, open trade may change. It’s impossible for there to not be geopolitical ramifications — China may suffer the most from this as corporations look to take their manufacturing base elsewhere to a country with less risk. Without widespread manufacturing and employment to grow their middle class, Communist China could slip back into the economic Third World. Will that happen? Who knows.

Regardless, world politics will never be the same.

The New Great Depression

There’s no doubt four weeks in to lockdown the people on the street are hurting the most. In the past 4 weeks, 22 million Americans have filed unemployment claims — by far a record. Now, this comes with an asterisk. For the first time, states are allowing self-employed (aka contractors) to apply for unemployment, and you can file for unemployment benefits if your hours have been reduced due to COVID-19.

While that may bump the numbers a bit, it certainly does not offset the amount of people who haven’t been able to file yet due to state unemployment offices being overwhelmed. States are forcing people to go online to file, but the state sites are crashing from the traffic. Because people have been unable to file yet, the official government U3 unemployment numbers are likely inaccurate at best, heavily underreporting at worst.

I think it’s naive to think that all these people will suddenly return to their old jobs when the lockdown is lifted. Many of these jobs won’t be there — and what about independent contractors and freelancers? These will be the hardest to return to work. Many employees of recognizable brands won’t have locations to return to either as companies close up shop and/or file bankruptcy — namely restaurants and discount stores.

Other industries that may be shrinking include shale, cruise lines, and airlines.

Does Anyone Really Know Anything?

I’ll end it with this bit: does anyone really know what’s going on? It sounds scary to even pose a question on such a scale, but after four weeks I cant help but openly wonder. The symptoms to COVID-19 keep changing or expanding — it was originally a respiratory illness with signs that included fever and cough. Then it expanded to bodily pain. More recently, loss of sense of smell (or taste) and foot sores as byproducts of the disease.

A NYC doctor even went so far as to post that the wrong disease is being treated.

There’s no vaccine. There’s no simple way to test. There’s even questions as to if ventilators are even the right tool to be using.

Where did it come from? Is it natural or a bio-weapon? The U.S. intelligence apparatus is investigating whether or not COVID-19 came from a Chinese bio-lab (that just so happened to be right near the wet market where its origin was originally tied to.

Without answers how can we have a plan? How long with the economic malaise go on? How long CAN it go on? Countries and states are devising plans to reopen for business, perhaps hoping warmer weather will deal with the disease.

There’s always the fear of a second wave coming in the fall.

Regardless of how this turns out, we are undoubtably living through history. Our personal lives and the course of humanity may be steered by this. It sounds overdramatic but how could it be any other way? Over half the population of this planet are in lockdown, forming new habits and getting used to the ‘new normal.’

Things will never be the same.

Does Taxing the Rich Work?

I know what you’re thinking. Why does a blog centered on quitting your job post about minimum wage and taxing the rich? While they’re mostly though experiments, to be financially free and entrepreneurial you must know your economic and political environment. Having a business or investments is highly impacted by what goes on in the political Thunderdome.

As with the thought experiment on Fight for $15, I want to walk through whether or not “taxing the rich” is a viable solution economically. “Tax the rich” has become a battlecry of several 2020 Democrat Presidential Candidates, as well as political policy in a bevy of states such as Oregon, where Senator Ron Wynden proposes taxes on ‘unrealized gains’ of assets of wealth people, or the governor of Illinois wanting to revamp the state tax code to make the wealthy pay more in state tax. Targeting the rich has become en vogue.

But does it work? It has been tried before and abandoned, so why would it work this time? Is it moral or fair? Does “tax the rich” merely promote classism? Is it biting the hand that feeds? Or is there social stability to be gained from it? It’s time to dig into it.

What is Rich?

When a politician says they want to “tax the rich,” what defines rich? In many cases it’s left intentionally vague — the “rich” being a boogeyman of sorts, the anachronistic caricature of a monocle and top hat wearing Rich Uncle Moneybags from the game of Monopoly. It’s Mr. Scrooge or the bourgeois of The Purge films. So who are The Rich?

According to Charles Schwab’s 2019 Modern Wealth survey, “Americans believe it takes an average $2.3 million in personal net worth to be considered “wealthy.” Another survey by seniorliving.org landed on the same number: $2.3 million as the amount to be considered wealthy.

Elizabeth Warren’s “Ultra-Millionaire tax” targets the rich as any household with a net worth of $50 million or more. Bernie Sanders’ proposal starts the taxing on net wealth over $32 million, a level which fellow 2020 Democratic candidate Tom Steyer agrees with. However, it appears “rich” is a relative term: according to Forbes, the net worth of these three candidates is $12 million, $2.5 million, and $1.6 billion, respectively. So, although Warren and Sanders are millionaires, they don’t consider themselves rich. And as for Steyer, I get suspicious whenever someone who is rich promotes taxing the rich.

So we have a starting point (somewhere between $32 and $50 million) for what qualifies for a “wealth tax.” Federal and state income tax brackets vary wildly (some states have a flat tax while others have no income tax), so we’ll stick with the proposed Federal “wealth tax” as a guideline for what is considered rich.

Do Higher Taxes Equal Higher Revenue?

“Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily popular with the masses, who do not have to pay them.”

Lugwig von Mises

The purpose of raising taxes on the wealthy — or instituting “wealth tax” — is to raise the amount of funds taken in by the state or federal government. But does it always go as planned?

The fallacy of taxing the rich to me is the assumption that those being heavily taxed will just sit there and take it. Take the case of actor Gerard Depardieu after France instituted a 75% “supertax” on their wealthy citizens. The actor famously renounced his French citizenship and moved to Russia, later threatening to sell all his French assets left behind. Depardieu wasn’t alone: an estimated 2.5 million French citizens left their home country to live elsewhere and the loss of labor, combined with “discouraged investment”, crushed French tax revenues by a 14 billion euro shortfall of the 30 billion euro estimated intake. The French wealth tax, called the “solidarity tax on wealth,” was eventually repealed in 2017.

Other European countries tried a wealth tax and eventually repealed it: Austria, Denmark, Finland, Germany, Iceland, Italy, the Netherlands, Luxembourg, and Sweden. (Sweden in particular become notorious for its wealth tax after Swedish children’s book author Astrid Lindgren paid 102% in income tax in 1976. Because she was self-employed, she was subject to both regular income tax and employer’s fees, resulting in being taxed over 100% for that year. The Pippi Longstocking author later wrote satirical children’s book about the incident called Pomperipossa in Monismania)

Due to capital flight, it was estimated that the French wealth tax actually reduced France’s GDP (gross domestic product) by 0.2% or 3.5 billion euros.

But back to the wealthy just “taking it” when higher taxes are instituted. It seems asinine to think that a wealthy person wouldn’t act according when faced with the prospect of the government taking more. University of Toronto economist David Seim found that “an increase in tax is likely to stimulate evasion” in his paper Behavioral Responses to an Annual Wealth Tax: Evidence From Sweden. He found that when a wealth tax went into effect, those targeted would shift taxable assets to tax-exempt assets, thereby legally lowering their taxable net worth below the threshold. In addition, wealth taxes — including Warren and Sanders’ proposed American taxes — is a tax on net worth. This means debt is deductible. So borrowing money would thereby reduce overall taxable net worth — and if you’re borrowing to invest in tax-exempt assets, you’re reducing your taxable net worth even further.

The problem is trying to hit a moving target. Those the wealth tax focuses on are affluent, mobile, and have the ability to fight back (more on that in a moment). It’s human nature to respond to someone (or something) that’s coming to take what you have. The rich business owner defends the assets he’s acquired as a caveman defends the prey he killed. The London Times wrote in 1894 in regards to Britains first progressive tax rates that “even the half starved crow will not wait to be continuously shot at.”

The current income tax structure also allows a bevy of deductions for real estate depreciation or cost of improvements; ‘tax loss harvesting’ allows for losses to be written off against gains, creating a net zero effect. A ‘rabbi trust‘ allows companies to give additional compensation that doesn’t count towards taxable compensation. Or take Senator John Kerry, who simply docked his $7 million yacht in Rhode Island instead of Massachusetts, saving him nearly $500,000 in taxes.

Ronald Reagan’s tax planning is just one simple example of how the rich can easily avoid the upper tax brackets. Someone noticed what a fine golf swing Reagan had, and the answer was that when he reached the top tax bracket, he stopped working and played golf for the rest of the year. Many wealthy doctors (and others) do the same thing, closing down their medical practice around August and then taking a vacation from earning money for the rest of the year. A government cannot force a wealthy taxpayer to work if the taxpayer finds the tax rates personally intolerable, especially if they are targeted for attack.

Charles Adams

Or you just leave altogether like Depardieu or Facebook co-founder Eduardo Saverin, who left the U.S. for Singapore and saved hundreds of millions of dollars in taxes.

Magnus Henrekson and Gunnar Du Rietz studied the history of the Swedish wealth tax. They found that “people could with impunity evade the tax by taking appropriate measures,” including taking on excessive debt to buy exempted assets. The Swedish wealth tax also prompted large outflows of capital and the expatriation of well-known business people, such as the founder of Ikea, Ingvar Kamprad. Henrekson and Du Rietz conclude, “The magnitude of these outflows was a major motivation for the repeal of the wealth tax in 2007.”

“Why Europe Axed its Wealth Taxes” by Chris Edwards

The point is, politicians expect to collect x amount in tax revenue assuming that those taxed do not respond or act in any way. Charles Adams wrote an article in 2004 called “The Rich Wont be Soaked” (source also for the quote above) showing that it’s always been this way:

History is full of amazing examples, like the first income tax in the United States, in 1916, when the top bracket was 7 percent; a few years later the top bracket was raised to 77 percent, or 11 times higher. Yet the 77 percent rate did not produce 11 times as much revenue; in fact it shocked the Treasury by producing almost the same revenue as the 7 percent rate did. At the 7 percent top bracket, about 1,300 returns were filed; with the 77 percent top bracket, only about 250 returns were filed. Where did all the top bracket taxpayers go? The rich simply rearranged their affairs to avoid the 77 percent tax rate.

Which brings us to the Laffer curve. Arthur Laffer believed people would adjust their behavior “in the face of incentives created by higher income tax rates.” The result was the Laffer curve, a graph showing more dwindling returns the higher the tax percentage. It essentially is a visual representation of the points mentioned above.

Courtesy of Investopedia

As the tax rate becomes more burdensome, the behavior to avoid increases. This could be through changing investments to tax friendlier ones or not investing at all. The end result either way is less tax revenue.

Enforcement

There is also the matter of enforcing the new laws and costs associated with them.

Recently, the IRS admitted to congress that the poor are far more likely to get audited than a rich person, because it’s easier and cheaper; the IRS told Congress it could be solved by an increase to the IRS budget. Elizabeth Warren’s plan specifically mentions “a significant increase in IRS spending” to help ensure no eligible wealthy person evades audit. After all, Warren, Sanders, and other wealth tax plans are a tax on all worldwide assets. The IRS is going to need to assess assets and wealth held overseas as well.

An even larger problem lies not in logistics but valuation. “All household assets” will be including in a wealth evaluation for the wealth tax. Cash, stocks, and property are somewhat easy to assess. But what about art? Family heirlooms? Will the IRS hire jewelers to assess the value of the family pearls or diamond rings? Maybe the Pawn Stars guys can evaluate what’s in the basement and attics of rich Americans. There seems to be no guidelines on estimating the worth of fringe assets. How about a privately-held businesses owned by the taxed wealthy? With no quarterly earnings report, an auditor will have to assess the full value of the private company — down to desks, equipment, and credit card bills. The valuation of a company can change even daily given the flow of business. And how do you value a multi-national company when taking into account currency exchange rates and overseas assets?

And this would have to be done every year.

Elizabeth Warren address this in her plan:

  • Valuing assets for the purposes of the Ultra-Millionaire Tax will provide an opportunity to tighten and expand upon existing valuation rules for the estate tax:The IRS already has rules to assess the value of many assets for estate tax purposes. The Ultra-Millionaire Tax is a chance for the IRS to tighten these existing rules to close loopholes and to develop new valuation rules as needed. For example, the IRS would be authorized to use cutting-edge retrospective and prospective formulaic valuation methods for certain harder-to-value assets like closely held business and non-owner-occupied real estate.

Bernie Sanders takes it a step further, requiring a “wealth registry,” something not defined on his website but presumably a government record of assets held by an individual.

Both of these creates a dark precedent: the government will come into homes to assess “assets”, taking record of what you own, and assign value to it. While there are guidelines to valuation, they’re ultimately left up to the IRS. Does this mean the IRS would also begin to operate internationally? The Foreign Account Tax Compliance Act already requires U.S. nationals with foreign assets or holdings to claim such holdings and for banks to report the individual’s funds to the U.S. government. But what about art or cars at foreign homes?

Enforcement at home and abroad comes with a cost. More tax officials and inspectors, more paperwork, more travel and expenses just to enforce the wealth tax. These costs go against any revenue raised by the taxes themselves. But do they effectively offset? There’s an issue of scale here: to fully realize maximum tax receipts, expenses associated with enforcement must also be maximized. Costs of enforcement could also rise over time while tax receipts could go down; in theory, the entire intake of tax revenues could be spent on enforcement.

Unintended Consequences

Because this is a thought experiment, we can assume the above headache of multi-national asset holding valuation gets done on Amazon CEO Jeff Bezos (a favorite target for Warren and Sanders). His numerous holdings and assets are assessed and valued. It comes in close to Forbes’ October 2019 valuation of $103 billion. Under Elizabeth Warren’s plan, Bezos would be subject to 6% wealth tax (2% tax since it’s over $50 million and additional 4% billionaire surtax since the number is over $1 billion). 2% tax on $1 billion is $20,000,000. The 4% surtax on $102,999,999,999 is $4.2 billion (rounded up). Combined, that’s $4.22 billion owed in wealth tax (which does not include Federal, state, and local income tax or capital gains taxes). And this amount is conservative compared to CNBC’s estimate of $9 billion Bezos would pay under Sanders’ 8% wealth tax.

Here’s where it gets interesting. The likelihood Bezos has that amount in pure cash is highly unlikely. His personal wealth comes from his ownership in Amazon, specifically his shareholdings. To cover the $4.22 billion owed, Bezos would have to sell 2.5 million shares of Amazon stock (based on its current valuation of $1,745 per share). But even then that wouldn’t be enough because Bezos would owe capital gains tax on selling the stock. He would have to sell additional shares just to cover capital gains on the 2.5 million shares AND the shares he was selling to cover the tax (as of this writing, long term capital gains tax on Bezos’ tax bracket is 20%)

The result is that Bezos is forced to reduce ownership in his own company to pay wealth tax; the selling of 2.5 million shares by the CEO would also likely cause panic in stock (including knowing he’d have to sell more the following year), driving it down in price as investors get spooked. Since Amazon is a commonly held stock in 401ks, IRAs, and pension portfolios, all are hit by the selling. Bezos is not alone in the tax. Other billionaires will be forced to sell company stock to pay wealth tax bills, thus retirement funds will bear the brunt of reduced stock value from each of these companies.

The other choice Bezos and other owners have is to liquid company assets to pay the tax bill. This is money taken out of the company — money that could be reinvested for growth or was originally earmarked for new projects and initiatives. The loss for the company translates into higher costs passed on to customers or cutbacks in jobs or pay. This would also likely result in a stock price decrease.

In either case, by the time the next tax season rolled around, the overall valuation would be less — either by selling off $4.22 billion (plus capital gains tax) in stock or by reduced stock price in the company due to devaluation. Maybe the following year, Bezos is worth less than $100 billion. Yes, he’d still be subject to the wealth tax at 6% (or Sanders’ 8%) but the tax receipts would be less than the previous year. So the amount of tax receipts would drop, offsetting less of the enforcement costs and costs to social programs instituted by the president candidates.

Think of it this way: Social program (SP) plus additional wealth tax enforcement costs (EC) equal the projected tax receipts from the eligible billionaires in the United States.

SP + EC = Billionaire Tax Revenues

The balanced equation gives the presidential candidates what they want – their taxes pay for their new spending. But if Bezos and other billionaires suffer a reduction in net asset value, the tax revenues will go down over time. Now the social program and enforcement costs are not being covered by tax revenues and there’s a shortfall. Now you have to either reduce the SP spending (which would be unpopular), or reduce EC spending, which makes it more difficult to enforce the tax which would likely result in even less tax revenues. The only other choice is more government debt to make up the shortfall.

What happens if Bezos pulls a Depardieu and leaves? Now he isn’t contributing any tax revenue (except for his one-time exit tax) and the shortfall is that much larger. He may decide to do just that: at some point, Bezos will have sold enough Amazon stock to threaten his voting ownership and control of his company. The value of Amazon stock could plunge if he lost control due to lack of ownership — further reducing the value of American pension plans and retirement portfolios.

This also raises the moral question of is it right to take away ownership of someone’s company just because it was successful to a high enough degree? Wouldn’t this de-incentivize future entrepreneurs and business people? After all, why build a company beyond a certain point if a wealth tax will cost you ownership? It’s Ronald Reagan hitting the green all over again.

So there you have it. While the wealth tax attracts populist attention, the reality behind it is murky at best. It has been tried in the past and ultimately withdrawn due to failure to meet results. If anything, the shift in behaviors will create disruptions in the economy — and worse the possible flight of capital to foreign shores. With less to wealth to tax, the shortfall needs to be made up somewhere, either in increased government debt or taxes on lower classes who can’t leave.

Based on this thought experiment, do you think a wealth tax is still viable? Comment below!

The Sky is Falling! Quitting Your Job During a Recession

Coming to a street corner near you!

“Plan for the future, that’s where you’re going to be spending the rest of your life.”

Mark Twain

A recession is coming. Depending on who you listen to, it’ll be here by election day or sometime in 2020. It was also supposed to be here already this year. Or was it 2017? Wait, maybe it was 2015. Remember when they were calling for recession in 2012, just 4 years after the Great Recession? Every year economists or newspapers warn of the ‘coming recession’ that lies just over the horizon.

After seven years of calling it wrong you’d think they’d give it a break. But they won’t — sells too many newspapers.

The point is, recessions do come around every so often. They’re a side effect of the business cycle. Borrowing and lending go too far and there’s a snap back. Economic repercussions usually include decreased spending, higher unemployment, tight credit or banks not lending.

So what to do if you’re looking to Quit Your Job or have already broken free?

The average person might fear recessions. They are, after all, times of great uncertainty. As someone in control of their finances, you should be excited at the opportunity that has presented itself. Prices fall in times of recession. Credit dries up, which leads to people spending less money (either because they don’t have it or would rather save or pay down debt), which leads to less sales and more inventory. The law of Supply and Demand tips the other way: demand drops and supply is more available, which brings down the price. In other words, things get cheaper because no one is buying anything.

The stock market becomes a super market sweep. When credit dries up, loans get called. This includes margin calls, where people and institutions that have borrowed money from brokerages to buy stocks and bonds are required to pay back the brokerage. Imagine you went ‘on margin’ in your E-Trade account, borrowing $10,000 and bought a bunch of Apple stock — the economy just dipped and AAPL stock is falling. E-Trade knows you borrowed money to buy a stock that’s losing value; they call the margin loan and you owe them $10,000 immediately. You have to sell your AAPL stock (likely other shares as well to make up the difference in value lost as AAPL stock fell). It’s not just you — hundreds of thousands of other people are being margin called by their brokerages and forced to sell.

If you’ve got cash, now is the time to buy. Over-leveraged (i.e., “bought with borrowed money”) investors have to dump. The stock market falls. Institutions like pension funds and hedge funds panic at the accelerating drop in prices so they sell stocks and buy bonds (generally regarded as safe havens during economic downturns). Them selling accelerates the stock market drop further. If you’ve got a rainy day fund of cash, you can swoop in and buy stocks cheap. When the recession ends and pensions and hedge funds move back into stocks, the prices go back up because they’re being bought. Something else to remember: a lot of stocks (particularly REITs) still pay dividends during recession. You can bolster your dividend ladder pretty well in a recession, adding to your portfolio of cash-paying stocks. Yes, your own stocks you were holding prior to the recession will likely take a hit, but will also likely keep paying dividends. REIT (Real Estate Investment Trusts) absolutely will.

Speaking of real estate, that also becomes another buying opportunity. The 2008 crash is a great example of this. Historically, real estate has always been regarded as a ‘safe investment,’ meaning value holds even during recession. However, recessions usually result in more inventory available in real estate. People who have unaffordable mortgages, suffer job loss, or end up moving due to economic downturn will either sell off their home or allow the bank to foreclose. Commercial property becomes widely available as sales dry up and force business to close or relocate. The more property that’s available, the lower the price goes. Again, law of supply and demand.

Recently, I read an amazing book called The Great Depression: A Diary (which I’m going to do a Required Reading post on), which is a published diary kept by a lawyer during the Great Depression of the 1930s. Throughout the entries over the years, the author bemoaned the fact that if he only had some cash he could buy up swaths of stocks, land, or businesses as they were going for pennies on the dollar.

Having cash when recession hits can set you up for massive future gains. As the old contrarian maxim goes, “buy when there’s blood in the streets.” It may be a bit melodramatic for this post, but the point is to buy when things look the worst.

So who is really at risk when recession time comes?

Employees, for one, at put at risk. If a company is forced to downsize or cut costs, labor is usually one of the first things to go (as it is usually the greatest expense). If you’re working a job and living paycheck to paycheck, you are the greatest at-risk. Loss of even a single paycheck will disrupt everything. Remember how hard employment spiked over the course of 2008?

Chart from http://www.bls.gov

Indebted people are another group at risk. Debt servicing becomes difficult if income drops or vanishes altogether. In some cases, banks can call a loan (like a mortgage) in the event of non-payment for a previously specified amount of time. Credit cards and personal loans will pile on interest and service fees for non-payment or late payments. Worse, if your income has dropped or you’re living on savings, huge chunks of your monthly income must redirect to debt, leaving you with less for other things. You might even be forced to sell things you don’t want to sell to satisfy debt payments.

Lastly, your business might be at risk. If you’ve read my blog in the past, you know I’m a fan of MJ DeMarco’s The Millionaire Fastlane and DeMarco’s advice of not starting a business based on what you love. You’re setting yourself up to fail if businesses aren’t founded on need. Businesses based on love — yoga studios or frozen yogurt shops — will be obliterated with the next recession. Thousands of etsy shops will close down. Endless side hustles will dry up. Why? Because as credit freezes and people lose their jobs and/or panic, spending vanishes. Subscriptions and memberships are cancelled. Penny pinching goes into overdrive — and these businesses will wither and die.

If, however, you founded your business based on market need, if you’re providing a valuable or even critical service or product, your business can survive. For some businesses, recession brings a boost. Bars and thrift stores thrive. The movie theater had its golden age during the Great Depression as people went to movies looking for escape and during the economic downturn of the 1970s, the Hollywood blockbuster was born. If your business is essential, it can weather the storm.

Back to the Mark Twain quote above. How can you prepare for the next recession if you’re planning to Quit Your Job?

The first one is easy, because you should have been doing it anyway to Quit Your Job: reduce debt. Pay down credit cards, pay off your car or student loan. Reduce your liability, the number of monthly payments, and the amount you need every month to meet bills.

The next best way to prepare is to have cash. Cash is your sword and your shield. You should have an emergency fund ready to cover several months of normal expenses. This will help bridge the gap and not disrupt your life should income drop or cut off altogether. In addition, having cash allows you to pick up assets at severe discount — buying stocks or property that will eventually regain in price. Just as a fun example, take Patrick Industries (ticker: PATK) company profile:

It manufactures and fabricates decorative vinyl and paper laminated panels; fabricated aluminum products; wrapped vinyl, paper, and hardwood profile moldings; solid surface, granite, and quartz countertops; cabinet doors and components; hardwood furniture; fiberglass bath and shower surrounds and fixtures; softwoods lumber; simulated wood and stone products; and others.

After the housing crash in 2008, the stock cratered to 28 cents per share. It’s obvious to see why, given its significance to home renovation and construction. From the low in March 2009 to the end of 2017, PATK gained over 24,000% in stock value. This is an extreme example, sure, but it illustrates how buying up something so unwanted could great gains in the future.

There’s a reason they say “cash is king,” and it has its roots in the Great Depression. At a time when everyone is selling assets to get cash, having cash makes your royalty.

If you want to learn more about setting yourself up to thrive in the next recession, check out some books like Recession-Proof by Jason Schenker or Recession-Proof Living by Bill Weise.

Required Reading: Shoe Dog and the Lessons From Business

“The cowards never started and the weak died along the way. That leaves us, ladies and gentlemen.” This quote sounds brutally honest, gritty, and harsh, which is exactly what Shoe Dog: A Memoir by the Creator of Nike by Phil Knight is. I loved this book and was sad when the journey was over. (Note: I listened to the Audible version of the book, narrated excellently by Norbert Leo Butz).

Everyone knows Nike, but I can’t imagine most know about Phil Knight, it’s founder. I didn’t, but the book appeared on many of the “Best Books on Business” lists out there on the internet. As it turns out, it is an excellent book on business — but not for reasons you would think. There is no section on starting a business, no textbook-like process of following steps to start then grow your own business to success. What Shoe Dog is is the life adventure of Knight and the day by day, year by year struggles of selling (and later manufacturing) shoes. It is a tale as full of wisdom as anything in the Bible or ancient myths.

Knight’s story is an inspiration for anyone who owns their own business (or is looking to do so). I catch myself thinking of the book and Knight as my business changes and grows. When I get stuck or frustrated at how things are going in my company, I think of Knight and the hardships he had to go through. At least I’m not constantly traveling to Asia.

I’ve done this Required Reading for Shoe Dog a little different than past Required Reading posts. I read (listened to) Shoe Dog at a pivotal time in my own business, and much of what Phil Knight wrote resonated with me in a profound way. I wasn’t just hearing the words, I was living them. So instead of listing 5 major takeaways from the book, I’m going to breakdown the ways Shoe Dog mirrors what I’m currently going through — and what anyone who wants to start their own business should know.

Seek a Calling

I’d tell men and women in their midtwenties not to settle for a job or a profession or even a career. Seek a calling. Even if you don’t know what that means, seek it. If you’re following your calling, the fatigue will be easier to bear, the disappointments will be fuel, the highs will be like nothing you’ve ever felt.

Starting, building, and maintaining a business takes an unlimited amount of focus and persistence. The casual observer of a business may think it’s easy, or the owner is talented or even just lucky. It’s easy to dismiss someone as “just lucky” when they have a successful business (or product, or app) but that’s because so much of the work and hardship is usually when you’re not being observed and never shared. This is why it’s important to seek a calling. You need that fuel, that bottomless reservoir of stamina and determination.

There’s been tough times. They’re usually wrapped in uncertainty and unpredictability. You never really know when they start or when they end, but you always know when you’re in them. If you know it’s your calling — that you’re the person to do this and no one else is going to do it as well — it keeps you going. I’m fortunate enough to have two business partners, and we’ve taken turns pulling each other up when one gets run down by the business or some element of it. For Phil Knight, it was mostly him — but he had a strong support group in his coach-turned-business-partner, his father, and later his wife. But it was his calling, the desire to bring quality and life-changing shoes to athletes, that kept him going.

The most important piece of the quote above is “disappointments will be fuel.” You must look at failures as a way to get better, to improve, to adjust and regroup. Too many people suffer a failure and it derails them. They lose focus. They want to give up and crawl away to something else. My business has had failures. We consult companies and schools for technology needs and custom solutions. Not ever job or client went perfectly. One of them was a disaster; several others almost were. My partners and I regrouped: “What went wrong? If we did it over, what would we change? How could we better prepare? What didn’t we know that we didn’t know?” If we didn’t have the calling to drive this business, any one of us could have given up at any time.

Take the hit. Get back up and do better next time. If you take two steps forward for every step back, you’ll still get there. With this comes the next section:

Fail Fast

“Starting my own business was the only thing that made life’s other risks—marriage, Vegas, alligator wrestling—seem like sure things. But my hope was that when I failed, if I failed, I’d fail quickly, so I’d have enough time, enough years, to implement all the hard-won lessons. I wasn’t much for setting goals, but this goal kept flashing through my mind every day, until it became my internal chant: Fail fast.” 

Nothing has driven my company more than failure. Sounds bad, doesn’t it? Only if you look at failure as a bad thing. When we started out, we had knowledge — technical, sales, and legal (each partner bringing one to the table) — but we didn’t have much else. Failing at everything else made us realize what was needed to succeed at our business. We didn’t have paperwork; we didn’t have standard operating procedures; we didn’t have even a real Mission Statement. We knew what we could do, and we knew there were people and businesses that needed it.

Phil Knight aimed to fail fast. Shoe design doesn’t work? Find out as quick as possible and change it. Japanese shoe factory can’t meet demand or is cutting corners? Fine, but find out quickly. If you fail fast, you succeed sooner. Imagine it this way: If you spend a year working on something only to find out it’s a failure, you’ve lost a year. Sure, you learned a great bit from the failure itself, but imagine if the failure happened much sooner.

It is true what he says about business making everything else in life feel like sure things. Having your own business is a risk. The risk goes the larger the business gets. My company recently hired its first full time employees. That means we’re growing, but the risk is that much greater: it’s not just the owners anymore, we’re responsible for five people and their livelihood. The revenue must come in to maintain these employees, let alone hire more in the future.

No Finish Line

“For that matter, few ideas are as crazy as my favorite thing, running. It’s hard. It’s painful. It’s risky. The rewards are few and far from guaranteed. When you run around an oval track, or down an empty road, you have no real destination. At least, none that can fully justify the effort. The act itself becomes the destination. It’s not just that there’s no finish line; it’s that you define the finish line. Whatever pleasures or gains you derive from the act of running, you must find them within. It’s all in how you frame it, how you sell it to yourself.” 

For Knight, running and business go hand-in-hand. This, of course, works on two levels as his business was running shoes (before branching out into other sports). Both are about pushing yourself, finding your own way to measure success, and come to the conclusion there is no real destination.

Why start a business? To become rich? Does that make money the measure of success? Or is it to make life better for others. How many others? How many bettered people would be considered a success? From day one, my business partners and I never discussed what would we considered success. But that’s okay, it didn’t stop us. But looking at it now, what would I consider ‘successful?’ For awhile it was yearly gross profit. That was a way to measure (and how most businesses measure) relative success. Was this year more profitable than last? But now success is measured in other ways to us. We have employees. We couldn’t do that if we weren’t growing; if we’re not growing than we must not be successful.

For a portion of Shoe Dog, Knight measured his success (and relayed it to others) by the number of pairs of shoes he sold. First hundreds, then thousands, eventually millions of running shoes sold first out of the trunk of his car later in company stores. But eventually, that huge number became irrelevant. He used it to try and secure more loans from the bank to keep his business going — buying more inventory and paying employees. But the numbers stopped mattering to the bank to extend his credit line. I believe Knight later found his measurement of success in the athletes he provided for. He speaks proudly of seeing Nike shoes at the Olympics for the first time — worn by American athletes winning medals in running and track and field. To him, success was taking care of these athletes by providing superior shoe design and material.

We recently experienced something similar as we worked to get a payroll loan from the bank for our new employees. We have just received the largest contract ever (by far) from a new, Fortune 500 level client. The contract is used as unsecured collateral in order to receive a line of credit from the bank for our brand new employees. To us, this contract was our measurement of success. To the bank, much like Knight, it doesn’t mean much. Also like Knight’s shoe business, we were only given barely enough to cover. While we saw our new contract as success, the bank clearly didn’t think much of it.

I don’t know if I have a finish line. Maybe I haven’t defined mine yet. Maybe it’s too early to see it. With my business, I’m somewhere in the middle of the race just trying to lead the pack. I’m not worried about it, the important thing now is to keep pushing. Our interim finish line is to provide this new client the best possible service and let the chips fall where they may.

Redefining ‘Winning’

“It seems wrong to call it “business”. It seems wrong to throw all those hectic days and sleepless nights, all those magnificent triumphs and desperate struggles, under that bland, generic banner: business. What we were doing felt like so much more. Each new day brought fifty new problems, fifty tough decisions that needed to be made, right now, and we were always acutely aware that one rash move, one wrong decision could be the end. The margin for error was forever getting narrower, while the stakes were forever creeping higher–and none of us wavered in the belief that “stakes” didn’t mean “money”. For some, I realize, business is the all-out pursuit of profits, period, full stop, but for use business was no more about making money than being human is about making blood. Yes, the human body needs blood. It needs to manufacture red and white cells and platelets and redistribute them evenly, smoothly, to all the right places, on time, or else. But that day-to-day of the human body isn’t our mission as human beings. It’s a basic process that enables our higher aims, and life always strives to transcend the basic processes of living–and at some point in the late 1970s, I did, too. I redefined winning, expanded it beyond my original definition of not losing, of merely staying alive. That was no longer enough to sustain me, or my company. We wanted, as all great business do, to create, to contribute, and we dared to say so aloud. When you make something, when you improve something, when you deliver something, when you add some new thing or service to the life of strangers, making them happier, or healthier, or safer, or better, and when you do it all crisply and efficiently, smartly, the way everything should be done but so seldom is–you’re participating more fully in the whole grand human drama. More than simply alive, you’re helping other to live more fully, and if that’s business, all right, call me a businessman.” 

I founded my business out of the needs of others. The kernel of my business idea was planted by my former job at Apple — hours, days behind the Genius Bar working with customers who weren’t able to get their needs addressed by the company. Particularly professions and businesses who were unable to bring their problems into the store. From there I convinced others that there was a need in this market, and I had the ability to fill it.

I’m proud my company was founded on solving the needs of others. Nobility aside, it proves of our right to exist. We meet a need that wasn’t being solved by others. Regardless of the size of the business, the need remains the same.

There’s something else above Knight’s quote above and Shoe Dog itself. Business is not glorious. Glory can be a component, an aspect of achievements earned by the business. But it’s mostly inglorious work. It’s bookkeeping, taking notes and making lists. Paying bills and contractors and employees. Knight’s allegory is correct: a business is very much like the inner workers of the human body, it never stops. Cash is merely part of that system; money goes in, money goes out. It’s these processes that keep the business moving to fill a need.

They say entrepreneurs learn to love the process. I think you have to or else you’ll never make it. If it’s all about the money, and you’re just waiting for the next payday, you’ll begin to lapse on the inglorious work. Things won’t get done or will slip. The business will break down.

There’s a tremendous more to Knight’s book than just his philosophy of business. The book itself is an experience from Knight’s adventures around the world (such as climbing Japan’s mount Fuji or seeing the Temple of Athena Nike in Greece), how a business goes from idea to full fledged movement, and the life of a runner in search of the perfect shoe. The book contains philosophies of life, quasi-mysticism of the business world, and just what never giving up can truly bring.

I miss this book. I loved listening to it and following Knight’s adventure. I was sad when it was over and it’s one of the few books I’ve read or listened to that gave a sense of true fulfillment. I cannot recommend it enough, especially if you’re thinking of going into business or even just looking for some guidance.

I think I’ll start it over again today.

Click this link to check out the book on Amazon. If you purchase it, it doesn’t cost any extra but I get a few cents from Amazon! You can also click on the image of the book all the way back at the top of this post to do the same.

Required Reading: 5 Takeaways From Before You Quit Your Job

Robert Kiyosaki has written a lot of books. I lost count somewhere in the teens. But when I saw this one on Amazon, I thought it would be perfect to review for this blog. It is, after all, about Quitting Your Job and what you need to know before doing so. I’ve talked about Kiyosaki in blog posts before, so this was a match made in heaven.

I wasn’t sure what to expect. Kiyosaki can be hit or miss. Some of his books I’ve given up on as they’re regurgitated bits from his other books or from talks he’s done. There was nothing new. (Critics are saying that’s all his new book Fake is: rehash) But I wanted to read this one just for the sake of this blog, so I took it head on. Plus, it would be interesting to see what he said after I’ve already Quit My Job. Would I agree? Did I quit my job the way Robert Kiyosaki says to?

The book can be summarized thusly: If you want to start a business so you can quit your job, you must make sure you have X, Y, and Z. That’s it. The rest is padded by life lessons and anecdotes. I was able to finally quit my job because my business grew to the point where I needed to devote myself to it fully, and didn’t need the day job paycheck to survive. The one thing I noticed was that my business DID have X, Y, and Z and we’re now bigger and doing more business than we ever have.

Point for Robert.

So here’s five takeaways I got from Before You Quit Your Job:

#1. What is an Entrepreneur?

I consider myself and entrepreneur. Not only because I built a business, but because I believe if you’re an independent filmmaker, you’re an entrepreneur. So how does one define the word? It’s tricky, and with the explosion of “start your own business” or “think like a business person” channels on YouTube or accounts on Instagram, the word entrepreneur is being thrown around quite a bit. Seriously, look up entrepreneur on YouTube and look at what you get: talking heads telling you how to build a successful business and quit your job to be an entrepreneur. But can any of them actually define the word?

Kiyosaki gives entrepreneurship the best definition I’ve ever seen (crediting Harvard professor Howard H. Stevenson): “the pursuit of opportunity without regard to resources currently controlled.” This also works flawlessly to describe an independent filmmaker. But that’s what an entrepreneur is — you see an opportunity and try to make it real, cash or resource or skill be damned.

My own personal experience fits right into this. I first identified the opportunity — a ‘Need’ — before I had the means or plan to fill it. But it was identifying it that set me on my path. I Quit My Job (the first time in 2014) setting off to build something to meet that need. Before I knew it, I had three business partners and the foundation for the company was being built. I didn’t have that before I left.

When I made my first film in 2012, it was the same thing. I had a script and a desire to make a movie. I didn’t have the money or the people yet. I had to seek them out. I built a team. We raised funds. I found money by selling stuff I owned or holding out my hat.

If you’re going to Quit Your Job, you’re going to need a business. And to start a business, you need to know just what an entrepreneur is.

#2. The Power of Excuses

Kiyosaki spends a small section confronting excuses. To quote: “Any two-year-old is an expert at making excuses. The reason most people who want to become entrepreneur remain employees is that they have some excuse that keeps them from quitting their job and taking that leap of faith. For many people, the power of their excuse is more powerful than their dreams.”

It happens all the time. Someone I know works a day job but has a dream to do something else. I always get excited hearing about what other people dream to do; I talk it up, start to ask them what their plan is to get there. Like clockwork, the excuses come out. Kiyosaki even lists the most common:

  • “I don’t have any money.”
  • “I can’t quit my job because I have kids to support.”
  • “I don’t have any contacts.”
  • “I’m not smart enough.”
  • “I don’t have the time. I’m too busy.”
  • “It takes too long to build a business.”
  • “I’m afraid. Building a business is too risky for me.”
  • “I’m too old.”

It’s like nails on a chalkboard. Excuses are what cause dreams to die. Imagine the amount of art, ideas, inventions, or technologies that we’ll never see because the person with the idea has an excuse.

Kiyosaki later gives a recap of a sit-down with a woman who was struggling after quitting her job to start a Network Marketing company. She took the leap and started the business. But, after 6 months, things were going terribly. Things were going terribly not just because she didn’t know how to sell but she refused to learn how to. She didn’t want to commit to new behaviors to make the business work. Even worse, she only wanted to work a few hours per week. Her excuses were different than the ones listed above, but they were still excuses: “I don’t want to.” She quit her job to start a business so she could work a lot less and make more money. So she failed at her business.

#3. The B-I Triangle

Kiyosaki loves his trademarked shapes and drawings. The CASHFLOW Quadrant is one example. The other is the B-I triangle shown in this book:

The B-I triangle, borrowed from http://www.richdad.com and I make no claim to ownership!

Simply put, for a business to survive and grow, you must have the five components and surround them with your business’s team, leadership, and mission. Kiyosaki gives the example of his early successful business, the surfer wallet company Rippers started in the 1970s. He didn’t have a legal component to his business and Rippers was brought down by competitors.

I look at the B-I triangle and compare to my own business. We cover all five (it helps that one partner is a licensed lawyer!) and we’re still in business five years into it.

I could break down each component, but it would take forever in this post. If you’re interested in reading more, pick up a copy of the book here and dive in. Just know that if you’re looking to build a business to Quit Your Job, it needs to have these bases covered. You’re going to need some sort of legal component (if anything to handle the mountain of paperwork involved with properly filing a business with state and federal governments!); an accountant (‘Cash Flow’) to help with taxes and expenses; marketing and sales (“Communications”) to get the word out about your “Product” (in our case, “service” is our “Product”); lastly, another word for “Systems” is “Network.” You need a network (How are you going to get your product out there? How are you going to get your product made? Packaged? Shipped?)

The other important point here is, if you’re going to grow your business and be successful it takes a team. You cannot try to be proficient in all five components — it won’t work. It’s best to focus or be strong in 1-2 of them and build a team to handle the rest. This is how we did it. I was the Product. One partner was Legal, the other was Systems and Communication. I brought in an accountant to handle Cash Flow. Yes, there are costs to building out the team. But you need to have them or it will all fall apart. If you’re flying solo, you’re going to need to hire a team around you.

One thing Kiyosaki doesn’t mention is that this B-I triangle also denotes the best way to grow. When you have a team in place, you’re not limited by the amount of hours you alone can physically work. A team shares the load, and a team can always be expanded. Think of Apple: Steve Jobs and Steve Wozniak started in a garage. They had a Product (and to some extent Systems). Apple is now huge because it’s not two guys in a garage hand building computers. There’s an entire Legal team. An entire Communications department to handle marketing and sales. Systems is now a network of factories in Asia and Europe building and shipping products.

#4. Working For Free

This section echoes the one with the failing network marketing business woman Kiyosaki met with. It is also one of the most important takeaways from the book. If you are good at your job in sales, that doesn’t mean you’ll have a successful sales business. Becoming successful means “working for free” a lot of the time.

“Working for free” is Kiyosaki’s Rich Dad euphemism for taking the time to practice or learn something without getting paid for it. The examples he uses are doctors (would you want someone who JUST quit their job to become surgeon to operate on you?), professional athletes, and even The Beatles.

“Even The Beatles worked for free before they became world famous and rich. Like the medical doctor or professional, they paid their dues. They did their homework. They did not ask for a guaranteed record contract, a steady paycheck, or medical benefits before they began practicing.”

The point is, you need to learn on your own (without getting paid) to build up your business and make it successful. If you have an idea for a great product, people aren’t going to buy your product if you’ve never made it before. Or tried it. Or even tested to see if it works. Part of the process of building your business is to spend the time learning it before you charge for it.

#5. The Entrepreneurial Process

It’s not as simple as, “I’m starting a business and then quit my job. My business will support me.” I tried it, and it didn’t work. When I quit Apple in 2014 to start my company, I expected enough money to come in early to not have to get a day job again. In six months I was filling out applications. Why? Maybe my goals were unrealistic. Maybe I didn’t appreciate the process enough of building a business. Or maybe I just didn’t know what I was doing yet.

In retrospect, what it really was was it took time. We had our B-I triangle intact. We were in a market space with little-to-no competition. But we had a lot of ground to cover — including failing. As Kiyosaki puts it, “since a new entrepreneur is creating something out of nothing, it is obvious mistakes will be made. In order to succeed, a new entrepreneur needs to be committed to going through these steps as soon as possible.”

  1. Start the business.
  2. Fail and learn.
  3. Find a mentor.
  4. Fail and learn.
  5. Take some classes.
  6. Keep failing and learning.
  7. Stop when successful.
  8. Celebrate.
  9. Count your money, the wins and the losses.
  10. Repeat the process.

I didn’t officially Quit My Job until #8. My business partners and I just hit #9 these past few weeks with the largest contract we’ve ever had. It’s not easy starting a business, and you must appreciate it takes time before you can Quit Your Job permanently. The failures are rough. You’ll want to quit. You’ll question why you’re doing it. But if you keep going, the successes will start to keep up with the failures.

If you’re going to Quit Your Job by building a business, you will not be able to quit your job right away. It took five years of working at it until I was able to finally quit. And even then, I wasn’t really prepared to quit. But my business reached a new peak that required my full time and that told me it was truly time to Quit My Job.

Required Reading: 5 Takeaways From Cashflow Quadrant

“The only difference between a rich person and a poor person is what they do in their spare time.”

Robert Kiyosaki

One of the segments I want to do with this blog I’m called “Required Reading,” which essentially is a combination book review and recommendation. I’ll write a post on a particularly educational or useful book and break down the top 5 takeaways.

If you’re reading this blog, you’re probably familiar with the name Robert Kiyosaki. He burst on the scene in 1997 with Rich Dad Poor Dad and has built an empire around financial literacy and education. Cashflow Quadrant was the follow up in 2000 to the hugely successful 1997 book and the Kiyosaki book that had the biggest impact on me.

I usually recommend this book very early to people who want to change their financial lives. It’s not a how-to book. It’s not a “baby step” book that tells you what to do. It’s a book that rewires your brain and changes how you think about money, jobs, and wealth. Kiyosaki breaks it down in very simple terms, exposing the reality behind things we take for granted, such as being an employee and the tax system. Cashflow Quadrant is very much required reading for anyone looking to break out of the rat race. Below are my top 5 takeaways from the book (but you should really read the whole thing):

#1. As an Employee, The System is Against You

The said ‘quadrant’ of the title is made up of four types of income: “E” (Employee), “S” (Specialist or Self-Employed), “B” (Business Owner), and “I” (Investor). The vast majority of people are “Es” and are also the most disadvantaged of the four. As an employee, taxes (income, social security, medicare, etc) are taken from you before you get any money. You pay taxes and get what’s left. As an “S” or “B” you have tax advantages, such as deductions and depreciation. These lower the amount that’s taxable; you spend money and pay taxes on what’s left. To make matters worse, “Es” are also taxed at the highest rates!

“Your boss cannot make you rich,” Kiyosaki writes. “The reality is, your boss’s job is not to make you rich. Your boss’s job is to make sure you get your paycheck.” Which is then taxed. If you remain an employee, you’re working hard for taxes and what’s left. Being an employee also usually takes away a lot of your time. You’re at the whim of a manager or company — you must adhere to their schedule and demands. If you’re unwise about your money skills and budgeting, “then all the money in the world cannot save you…if you budget your money wisely, and learn about either the “B” or “I” quadrant, then you are on your own path to great personal fortune, and, most importantly, freedom.”

What’s even more messed up is the fact that The System only gives tax breaks for “Es” if you go further into debt. Think about it: as a business owner, your expenses and the “cost of doing business” are deductible from your income, reducing what you pay taxes on; as an “E” the only tax breaks you get are from taking on debt like a home mortgage or student loans. These two (usually large) loans have tax deductible interest. But you have to go into big time debt just to get the deduction. Simply put, you want to get out of the “E” quadrant as fast as possible.

#2. In Debt vs Indebted

“The more people you are indebted to, the poorer you are. And the more people you have indebted to you, the wealthier you are. That is the game.”

This one is brilliantly simple. If you owe a bank a mortgage, another bank credit card debt, another institution student loan debt, your parents $100 you borrowed, you are in debt to someone else. Your earned money is taken away by these debts. However, if someone owes you, you earn money by these debts. As a property renter or bond buyer or lending via a Peer-to-Peer lending service, people are indebted to you. “We are all in debt to someone else,” says Kiyosaki. “The problems occur when the debt gets out of balance.”

“The world simply takes from the poor, the weak, the financially uninformed. If you have too much debt, the world takes everything you have…your time, your work, your home, your life, your confidence, and then they take your dignity, if you let them. I did not make up this game, I do not make the rules, but I do know the game…”

#3. Mind Your Own Business

Kiyosaki shatters “Industrial Age” adages and beliefs against the rock of reality that is the 21st century. “Go to school and get good grades, so you can find a safe, secure job with good pay and excellent benefits,” he points to as out-of-date advice. “Work hard so you can buy the home of your dreams. After all, your home is an assent and is your most important investment.” “Having a large mortgage is good because the government gives you a tax deduction for your interest payments.” “Buy now, pay later.”

As Kiyosaki points out, people who “blindly follow” the advice above often end up as employees (“making their bosses and owners rich”), debtors (“making banks and money lenders rich”), taxpayers (“making the government rich”), and consumers (“making many other businesses rich”) The people following this advice are making everyone else rich but themselves! “They work all their lives minding everyone else’s.”

To break out of this, you must move into the “B” and “I” quadrants. Move from the employee to the employer. How do you do this? Start a business. Offer a product or service. To enter the “I” quadrant as an investor, learn about finance and investing. Buy stocks or bonds that generate income. Or buy an existing franchise! Don’t work at McDonald’s, own one. It may seem like a leap, but as Kiyosaki will repeat over and over, it’s about financial education. Don’t grow other people’s businesses, grow your own.

#4. Assets and Liabilities

Find any YouTube interview with Kiyosaki (or read any of his books) and I guarantee you will hear him mention these two things. “An asset,” he likes to say, “puts money into my pocket. A liability takes money out of my pocket.” He punctuates this always by stating “your home is NOT an asset!” The mindset is that buying a home with a large mortgage is an asset — this is archaic thinking — because the mortgage interest is tax deductible. But you still have the monthly mortgage payment. And property taxes. And Private Mortgage Insurance (PMI) if you put down under 20%. Plus you have renovations and repairs. But a home becomes an asset when your rent it. The rent brings in monthly income. The repairs and renovations become tax deductible as business expenses.

Thinking more about these two things really changed my focus on spending money. When I spend money now, I think “is it an asset or a liability?” “Will it make my money or cost me money?” I get excited when I buy a new stock or more shares of a stock I already own. They’re going to go to work for me and make money. I had to buy a new car not long ago and groaned about the new liability — but if I use it to Uber or Amazon Flex, now it’s an asset because it puts money in my pocket. The gas I use and tires I purchase are now business expenses.

Assets and liabilities are as core to wealth as supply and demand.

#5. Other People’s Time and Money

“OPT” and “OPM” as Kiyosaki calls them are “found on the right side of the quadrant.” A “B” Business Owner and “I” investor become wealthy using other people’s time and money. It sounds sinister, but think it through. If you’re an employee, you have a job because someone built a business around an idea or product. Your paycheck is the direct result of someone else’s time and money. Put yourself on the other side of the equation: by putting in the time and money to start a business, you begin to earn back both at the expense of someone else’s who works for you.

The “I” quadrant is the most unique. In the “I”, Kiyosaki says “money works for you.” This is why I love investing so much. If I buy shares of Coca-Cola, the company is doing the work for me. The stock may increase in value, making me money. Then, every quarter, they pay me money in the form of a dividend. I don’t work for Coca-Cola. I don’t attend any meetings or drive anywhere. I don’t even get a paycheck from them. I get increased asset (there’s that word again!) value and a dividend. Best of all, I still have all of my time to dedicate to something else (or nothing, if I chose).

Kiyosaki: “A few years ago, I read this article that said most rich people received 70% of their income from investments, or the “I” quadrant, and less than 30% from wages, or the “E” quadrant. And if they were an “E”, chances were that they were employees of their own corporation.”

I have barely scratched the surface of Cashflow Quadrant with this post. It was one of the earliest books I read when I wanted to change my thinking on finances and wealth and it had one of the greatest impacts. It pulled back the curtain. It shook me out of a sleepwalking daze of going to work day in and day out, collecting a paycheck that was heavily taxed and withheld. It put me on the path to financial freedom. I cannot recommend it enough! To help you on your own personal wealth journey, I added a link to buy a copy below by clicking on the cover or here.


Required Reading: 5 Takeaways from The Millionaire Fastlane

One of the segments I want to do with this blog I’m called “Required Reading,” which essentially is a combination book review and recommendation. I’ll write a post on a particularly educational or useful book and break down the top 5 takeaways.

If you read my “Top 10 Books For Financial Freedom” post, you’ll know that MJ Demarco’s The Millionaire Fastlane sat at my #1 spot. For me, this book changed everything in my journey to financial independence. Moreover, because I read it after reading so many other common authors on personal finance, DeMarco’s book came as a shock.

The first time I read it, I had to actually put it down after a few chapters because it scared the crap out of me. DeMarco’s arguments were sound, rational, and completely countered the more conventional ‘gurus’ and authors out there. I was midway through my personal financial transformation when I picked up The Millionaire Fastlane and it made me rethink my process. So without further ado, let’s get into it:

#1. “The Promise of Wealth…The Price? Your Life”

“By working faithfully 8 hours a day, you may eventually get to be the boss and work 12 hours a day.” ~ Robert Frost

The conventional financial ‘wisdom’ of financial gurus such as Dave Ramsey, Suze Orman, or Tony Robbins is build around the idea of using time to compound investments. By continually contributing to a 401k or IRA and allowing it to compound (e.g., increase in value and reinvest dividends) over time, it becomes your method of financial freedom. As Ramsey calls it, a “Cash Mutual Fund Millionaire.” The key to this, of course, is time. Work a job for forty years, investing all the while. Take the employer 401k or IRA match. Let it grow, and when you retire at 65, you’ll have millionaires to “retire with dignity.”

DeMarco refers to this strategy as the ‘Slow Lane.’ He counterpunches: “It’s a lie so deceiving that when uncovered, decades of life have passed…The driving force behind behind wealth under Get Rich Slow is time — time employed at the job and time invested in the markets. Your glorious tomorrow might arrive after 40 years, when you’re living your last presidential administration and on your second hip replacement.”

DeMarco goes on to point out the best way to enjoy wealth is when it’s lived young, when you have “health, vibrancy, energy, and yes, maybe even some hair.” The idea of waiting to enjoy life when you’re older, breaking down, and possibly even bedridden does not come across as appealing. You give up the good, healthy years to be free during the older, medically-dependent years.

Even worse, what’s the guarantee you’ll even make it? The average life expectancy (as of 2018) in the U.S. is 76. That means working for 40 years to enjoy 11 (if you retire at 65). The math isn’t worth it. DeMarco brings up the fact that, even if you do live long enough to retire, there’s no guarantee you’ll be a millionaire. The gurus’ plans don’t work without a job, or if the market goes south, or if a housing crisis wipes out 40% of your illiquid net worth in a year (as the 2008 crisis exposed to many).

#2. Your Definition of Wealth Has Been Corrupted

“Money doesn’t buy happiness when it’s misused,” DeMarco writes. “Instead of money buying freedom, it buys bondage.” The idea is that people want to feel wealth, so they buy things they cannot afford to look wealthy. By craving respect and admiration, you expect wealth to bring you into happiness. “Society says wealth is “stuff,” and because of this faulty definition, the bridge between wealth and happiness collapses.”

Indeed, wealth has become something of a dirty word in society in the era of “We Are the 99%.” Wealth is equated with sports cars, big houses, and showing off lavish vacations on Instagram. These objects of wealth are sources of envy and disdain, leading many people to sneer at the mention of wealth or money. However, DeMarco says, “used properly, money buys freedom.” Freedom buys choice. Those that chose to use money to flaunt fake wealth end up deeply in debt trying to maintain it, and are forced to work to pay that debt and keep the cycle going.

DeMarco illustrates wealth as freedom further:

  • Money buys the freedom to watch your kids grow up
  • Money buys the freedom to pursue your craziest dreams
  • Money buys the freedom to make a difference in the world
  • Money buys the freedom to build and strengthen relationships
  • Money buys the freedom to do what you love, with financial validation removed from the equation

These are nothing to be ashamed of.

#3. “Wealth is a Process, Not an Event”

Earning wealth is not a sexy process. Sexy is winning the lottery, opening your front door to find Ed McMahon with a giant check, or hitting it big at the casino. However, these events are highly, highly unlikely and cannot be planned or earned, no matter how much effort or time is put into it. As DeMarco puts it, “Millionaires are forged by process…self made millionaires create their wealth by a carefully orchestrated process.”

The ‘process’ never makes the headlines. DeMarco uses the examples of an athlete scoring a $50 million contract or an Internet wiz selling his company for $30 million. The ‘event’ (the contract or deal) is “showcased for all to admire.” People read about it and say “gee, if only I could be so lucky.” What’s not lauded is the amount of work it took to get there. Years of shooting free throws alone in a gym or endless nights coding alone in the dark are unsexy. The process is hidden from the headlines, buried deep in paragraphs or tucked into the end of the story.

Wealth takes time. Don’t plan to inherit a family fortune, to win the lottery, or file frivolous lawsuits trying to win big. Do it one step at a time. Put the hours in. Be okay with things taking time; learn to respect and enjoy the process. As a reminder, 70% of lottery winners go broke because they didn’t have a process. They won money through an event and quickly spent it away because they didn’t earn it.

#4. Never Start a Business ‘Doing What You Love’

This one was a bit of shocker. Not because I started a business out of doing what I loved, but because it’s such a common saying. Do you love animals? Open a pet grooming shop. Do you love doing yoga? Open a yoga studio. If you’re going to put time and money into a business, why not do what you love? It only makes logical sense right?

DeMarco points out the fatal flaw: opening a business doing what you love does not guarantee business. Most business started out of a love of something end up shuttering their doors due to lack of customers. They weren’t started to satisfy a ‘need’ or no ‘need’ was identified to build a business around the solution. Without a guarantee of customers who have a need for your solution, it’s not going to work.

“Stop thinking about business in terms of your selfish desires, whether it’s money, dreams or “do what you love.” Instead, chase needs, problems, pain points, service deficiencies, and emotions.”

I can testify to this. I started my business in 2014 after identifying a need working at Apple. Business owners and customers all wanted on-site support or installation, which Apple refused to provide (for a myriad of reasons). It eventually got to the point where customers were offering bribes to get me to come to their house or office to resolve issues or help them. I eventually quit my job to build a business around these needs. Five years later, the company is doing more business than ever before.

So what does DeMarco suggest to finally do what you love? If you go back to #2 on this list, the answer is have wealth first. If you build a business around a need, you’ll have customers. Customer will bring wealth. Wealth will allow you to do whatever you want, including pursuing what you love to do.

#5. Instead of Digging For Gold, Sell Shovels

I love the wisdom of “What’s the best way to get rich in a gold rush? Sell shovels.” Being a producer is the fastest way to become wealthy. What is a producer? Someone who has something to offer. As Robert Kiyosaki says, “Have something to sell. The poor have nothing to sell.”

DeMarco: “Instead of digging for gold, sell shovels. Instead of taking a class, offer a class. Instead of borrowing money, lend it. Instead of taking a job, hire for jobs. Instead of taking a mortgage, hold a mortgage. Break free from consumption, switch sides, and reorient to the world as producer.”

The point is, make yourself valuable. If you have a valuable or useful skill, people will seek you out. If you have something to offer, customers will be found. A lot of the mentality I find — especially among coworkers and family — is based around “what can I buy” or “how much can I have.” It’s a consumer culture. We are bombarded with advertisements and incentives to consume. It’s up to you to change your way of thinking, “switch sides” as DeMarco calls it, and become the one offering to consumers. “If millions seek you,” he adds, “you will be paid millions.”


I highly recommend The Millionaire Fastlane to anyone interested in breaking free of The Slow Lane or even The Sidewalk. It will change your way of thinking and hopefully set you in a direction to prosperity and financial freedom. I could easily have expanded my top 5 takeaways to top 10 or even 15, but this post would have gone on forever. DeMarco followed up The Millionaire Fastlane with a sequel, called UNSCRIPTED, which I will cover in another blog post! Pick up a copy of The Millionaire Fastlane (you can do so by clicking the book above) and take off down the Fastlane.