Author Topic: Trust in the Market? Or Trust in Yourself and Your Business?  (Read 4903 times)

bunchbikes

  • Bristles
  • ***
  • Posts: 325
People like to shut down any advice about getting into entrepreneurship and starting a business by saying "most businesses fail", or "it's too risky".

What these people don't want to talk about is what if their plan (relying on the markets to generate their wealth over decades) fails?


This is an interesting quote from Unscripted by MJ DeMarco (new book by author of The Millionaire Fastlane)

"Failure is normally temporary and can be remedied by trying again. A compound-interest failure is permanent because it's attempt spans decades. Trying again is impossible".


Discuss.
« Last Edit: May 14, 2017, 08:16:20 PM by CargoBiker »

maizefolk

  • Walrus Stache
  • *******
  • Posts: 7400
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #1 on: May 14, 2017, 07:19:40 AM »
Why not both? I have a grand total of $5k invested across the two startups I'm involved with (plus lots of sweat equity obviously). One grew organically out of reinvested profits, the other we actually did pitches and attracted outside investment.

Finding out whether or not you can make a strong enough case for your new business model to convince outside investors is a good filter to get rid of a lot of the business ideas that are doomed to fail. (Obviously huge numbers of investor backed startups also fail). Bootstrapping a startup out of ongoing revenue ensures you'll see problems with your business model early on (but obviously isn't viable for some types of businesses).

The failure of a startup is survivable (and often educational). The failure of a startup that you've invested your life savings in can be a much more serious setback.

lostamonkey

  • Bristles
  • ***
  • Posts: 450
  • Location: Canada
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #2 on: May 14, 2017, 08:10:10 AM »
If you invest in diversified index funds and withdraw money at 4%, your odds of failure are nominal.

If you buy an established business, your odds of failure are much higher even if it's a low risk industry and you have strong business skills. Return on investment on buying an established business is generally much higher than buying index funds though.

If you startup your own company/business, the odds of failure (generally speaking) are even higher but so are the returns. Often the cost of a startup may not be too significant (other than opportunity cost of your time) so failure isn't a huge problem.

maizefolk

  • Walrus Stache
  • *******
  • Posts: 7400
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #3 on: May 14, 2017, 08:38:38 AM »
If you invest in diversified index funds and withdraw money at 4%, your odds of failure are nominal.

If you buy an established business, your odds of failure are much higher even if it's a low risk industry and you have strong business skills. Return on investment on buying an established business is generally much higher than buying index funds though.

If you startup your own company/business, the odds of failure (generally speaking) are even higher but so are the returns. Often the cost of a startup may not be too significant (other than opportunity cost of your time) so failure isn't a huge problem.

The scary ones are storefront businesses (restaurants, coffee shops, specialty retail stores) where the initial cost is high, failure is a big problem, and the rewards of success generally aren't commensurate with the risk. Lots of upfront costs -- remodeling the space, paying rent before you've even opened, purchasing inventory, lots of spending on labor while you are waiting for business to kick in. No potential for exponential growth even if your business is a hit. And these are exactly the types of businesses where people will use ROBS* to get their starting capital and, after the smoke clears from a failed business have lost their entire retirement savings as well.

*RollOvers as Business Startup. It's a finicky but maybe technically legal approach where you create a 401k plan for your new business, roll over all your retirement savings into the 401k plan, and then use that money to purchase "company stock." Your company then turns around and spends that money actually trying to create a profitable business. Viola, you've managed to liquidate all your retirement savings and invest them in a single high risk startup business, but at least you didn't have to pay a 10% early withdrawal penalty.

swick

  • Magnum Stache
  • ******
  • Posts: 2877
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #4 on: May 14, 2017, 08:57:33 AM »
I don't see it as having to choose one, it is about being smart with diversification and the assets/currency you have available.

I think what a lot of people who aren't entrepreneurs don't realize is that "time" can be a passive and active currency.

It makes sense to take advantage of passive time by parking money in index funds if there is a tax advantage to doing so. It might make sense for an individual who doesn't have the skills or interest develop their own thing to make it their main strategy. The only problem is there is no such thing as "job security" and I would much rather bet on myself.

One of my friends who ER'd said that based on their calculations, by going the entrepreneurial route (real estate) they were able to ER 8 years faster than if they had just plowed everything into Index Funds. For them, it was totally worth it.

Diversifying your options also allows you to gain a bunch of new skills and meet incredible people and keep your mind sharp. All of which help you once you FIRE. Seeing "time" as an active resource that can utilize and speed up your financial goals is not something everyone considers is an option.

I also don't know anyone who is FI who is not bringing in some sort of income from their various side projects, most are being done for fun and there is a lot of money being donated from these activities.

I think that is the danger of the fully passive index idea, you are kinda locked into a path and you go on autopilot and you don't realize there are all these other amazing, fun opportunities that can help you FIRE faster, or you don't realize that you can FIRE earlier because when you are not beholden to someone else's schedule and pay grade, you CAN create your own opportunities and income relatively easily.



bunchbikes

  • Bristles
  • ***
  • Posts: 325
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #5 on: May 14, 2017, 07:40:59 PM »
Often the cost of a startup may not be too significant (other than opportunity cost of your time) so failure isn't a huge problem.

This is true. In some people's situations (mine) failure is even necessary to learn the lessons that will enable to knock it out of the park later on.

I bring up starting small and minimizing risk to people sometimes, and all I get in response is:

"nope nope nope

business is too risky you will lose everything."


I'm in product-based businesses, and probably the worst case scenario for a startup, is that you sell off your inventory at cost, break-even, and move on.  Unless you are really bad at picking products, then you'll dump it at a fire-sale price, and make back a portion of your investment, and move on. 
« Last Edit: May 14, 2017, 07:45:24 PM by CargoBiker »

bunchbikes

  • Bristles
  • ***
  • Posts: 325
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #6 on: May 14, 2017, 07:59:52 PM »
Not everyone is cut out to be an entrepreneur.  Some folks are better off working as a software engineer for 8-12 years, investing in whole market index funds, and calling it quits.  That's actually the better play for their skill set and temperment. But not everyone understands that -- especially not people who are generating their income by charging $50/month to access the "Fastlane Insiders" forum.  I like MJ's first book.  Has he had a business success since limo.com? 

His books, personal brands, and online community is his current business.

I getcha on the software engineers.  Assuming a software engineer (or other high earner) is cool living a frugal, base-line lifestyle (nothing wrong with that), then this plan is doable. The worst part is having to give up 8-12 years of your time working a job you may not particularly like or enjoy, whereas a business might give you some time independence earlier in the journey. That's not really the topic of the thread though. Some can achieve business success much faster than 8 years, others might take the same amount of time, others might fail.

Quote
and if the market fails during one's retirement, well then they have a pile of money to start a business, don't they?

Haha, nice.  I really like this counter-point.

bunchbikes

  • Bristles
  • ***
  • Posts: 325
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #7 on: May 14, 2017, 08:05:20 PM »
Quote
*RollOvers as Business Startup. It's a finicky but maybe technically legal approach where you create a 401k plan for your new business, roll over all your retirement savings into the 401k plan, and then use that money to purchase "company stock." Your company then turns around and spends that money actually trying to create a profitable business. Viola, you've managed to liquidate all your retirement savings and invest them in a single high risk startup business, but at least you didn't have to pay a 10% early withdrawal penalty.

You make it sound so appealing.

Do people sign up for these things?   


Wow.

bunchbikes

  • Bristles
  • ***
  • Posts: 325
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #8 on: May 14, 2017, 08:15:18 PM »
It makes sense to take advantage of passive time by parking money in index funds if there is a tax advantage to doing so. It might make sense for an individual who doesn't have the skills or interest develop their own thing to make it their main strategy. The only problem is there is no such thing as "job security" and I would much rather bet on myself.

Yeah, I didn't get into the aspect of job security in the OP. It's interesting, that is almost an afterthought to the big graphs you see on financial sites showing stock market returns over time "if you contribute $XXX per month, for X years".  It's implied that you will have steady income always, no major life catastrophes will happen, all you have to do is save.

Quote
I think that is the danger of the fully passive index idea, you are kinda locked into a path and you go on autopilot and you don't realize there are all these other amazing, fun opportunities that can help you FIRE faster, or you don't realize that you can FIRE earlier because when you are not beholden to someone else's schedule and pay grade, you CAN create your own opportunities and income relatively easily.

Exactly.  So much of the strategy on this forum is purely mathematical.

There is an opportunity cost of lost time of "X years slaving away at a job".

Some might hate working on their own and doing their own thing.  I get it, it's hard. And if it's not uncomfortable, then you probably aren't doing it right. However, despite this, I love every day of my life now... vs. hating most of my waking hours, 5 days a week, before.

I think the journey is more interesting down this path.

joonifloofeefloo

  • Magnum Stache
  • ******
  • Posts: 4865
  • On a forum break :)
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #9 on: May 14, 2017, 08:31:22 PM »
+1 to "both." For me, that's a critical aspect of diversification. To answer the other aspect of your q, I do trust me more than the market, though.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 8956
  • Location: Fayetteville, NC
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #10 on: May 14, 2017, 09:38:30 PM »
I'm firmly in the "both" camp.

I've started lots of businesses.    They are explained here:  https://forum.mrmoneymustache.com/entrepreneurship/swordguy's-entrepreneurial-odyssey/

You never know when the skills or contacts or friends you will make while you try out various entrepreneurial attempts will pan out for you.
Plus, you'll generally be a more interesting person and possibly a nicer one.   (If you're only gaining skills and contacts, but not friends, then scratch that last clause on that last sentence - unless your activity is one you do pretty much by yourself.)

The key to me to starting a business is to have a plan to "fail forward".   Make sure that if it goes under, it won't leave you with debt or a reputation that will cripple your next attempt.  Ditto on making sure (success OR failure) it won't ruin your relationships or your health.
Make sure you extract skills, contacts and friends from the attempt.

That way, you can start again with more strengths!

Don't be like the guy in my mom's neighborhood who took his life's savings in his 60s and started a business with it.   It failed and now he's living on SS and doing odd jobs for a few bucks.   Fail forward, not backward, if you end up failing!

bunchbikes

  • Bristles
  • ***
  • Posts: 325
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #11 on: May 15, 2017, 04:39:36 AM »
The key to me to starting a business is to have a plan to "fail forward".   Make sure that if it goes under, it won't leave you with debt or a reputation that will cripple your next attempt.  Ditto on making sure (success OR failure) it won't ruin your relationships or your health.
Make sure you extract skills, contacts and friends from the attempt.

That way, you can start again with more strengths!

This is great advice!

I had one business that "failed" (appliance repair and used appliance sales), however, failing meant:  making 60% of my dayjob income, learned a ton of new skills, made some friends and neighborhood connections.  So I guess I failed to replace my job (which was the goal), but it was definitely a "fall forward".  I'll be able to keep our appliances going forever too!

maizefolk

  • Walrus Stache
  • *******
  • Posts: 7400
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #12 on: May 15, 2017, 09:41:18 AM »
Don't be like the guy in my mom's neighborhood who took his life's savings in his 60s and started a business with it.   It failed and now he's living on SS and doing odd jobs for a few bucks. 

This is my concern when people start throwing around line about trusting yourself instead of the market, as, taken literally, it would seem to justify, or even require, liquifying your entire life savings and pouring it into a business venture that may or may not succeed. Trust yourself and trust the market.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 2369
  • Age: 64
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #13 on: May 15, 2017, 09:43:13 AM »

The failure of a startup is survivable (and often educational). The failure of a startup that you've invested your life savings in can be a much more serious setback.

The above comment, I think, reflects much wisdom.

Startups can be like going to bat in a baseball game or throwing the long pass in football. If you get another at bat or another possession and on that next attempt succeed, you can end up with a win.

The second sentence in maizeman's comment also needs to be thoroughly weighted though... if the business failure destroys your life savings, you are probably in terrible, terrible trouble.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 2369
  • Age: 64
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #14 on: May 15, 2017, 09:50:43 AM »
Don't be like the guy in my mom's neighborhood who took his life's savings in his 60s and started a business with it.   It failed and now he's living on SS and doing odd jobs for a few bucks. 

This is my concern when people start throwing around line about trusting yourself instead of the market, as, taken literally, it would seem to justify, or even require, liquifying your entire life savings and pouring it into a business venture that may or may not succeed. Trust yourself and trust the market.
+1

MaaS

  • Stubble
  • **
  • Posts: 243
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #15 on: May 22, 2017, 01:06:37 PM »
People like to shut down any advice about getting into entrepreneurship and starting a business by saying "most businesses fail", or "it's too risky".

What these people don't want to talk about is what if their plan (relying on the markets to generate their wealth over decades) fails?


This is an interesting quote from Unscripted by MJ DeMarco (new book by author of The Millionaire Fastlane)

"Failure is normally temporary and can be remedied by trying again. A compound-interest failure is permanent because it's attempt spans decades. Trying again is impossible".


Discuss.

Obvious answer is both, but I get that's not quite what you mean.

I personally believe in betting on myself.  The pace of change in the world is accelerating to unprecedented levels.  Entire industries are going to fall like a house of cards over the coming decades. 

New ones will rise just as quickly.

My business is based on helping other businesses stay ahead of the curve (marketing consulting).  I personally believe this eliminates risk for the future.

But yeah.. almost all of my profits go into the market.

bunchbikes

  • Bristles
  • ***
  • Posts: 325
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #16 on: May 22, 2017, 07:51:40 PM »
Obvious answer is both, but I get that's not quite what you mean.

I think I got this thread started off a little mis-directed, without providing the context of the quote.

The quote in the OP was more of a response to "traditional" financial advice, of saving a little bit a month (10% or whatever) until you retire at 65%, and magically, the market will have generated you enough wealth to retire.

So, he advocates using the market as wealth preservation, of wealth produced by another means (a business) rather than as the primary wealth creator.

That's no different from how the folks here think, they just pursue wealth creation through a high-income job and incredibly high savings rate for 7-10 years.

Quote
But yeah.. almost all of my profits go into the market.

Why not into growth?  Or do you not want to grow beyond a one-man show?

CareCPA

  • Bristles
  • ***
  • Posts: 342
  • Location: Northcentral PA
    • Care CPA - Tax, Accounting and Payroll
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #17 on: May 23, 2017, 07:05:29 AM »
Yeah, I think it's more like, "Why would I make a high volatility play on entrepreneurism when I can instead very safely work 8-12 years and then call it quits?" Yes, the upside of income is much higher in entrepreneurism... but that doesn't make it the right approach for every person. 
...
You are aware that this is the "Enrepreneurship" subforum, right? Not the "sit in my office for a decade" subforum.

Fishindude

  • Magnum Stache
  • ******
  • Posts: 3075
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #18 on: May 23, 2017, 07:18:47 AM »
I did both and recently retired.

It's true that owning a business is typically more risky than just letting money ride in the market, but without taking some risk, there is no chance of really high rewards that you would never get out of the stock market.  If my money in the stock market earned 7% day in, day out over a long period of time I'd be quite pleased.  In business you need to make much greater returns than that, due to the risk involved, and particularly if your work flow is somewhat unsteady.  We grossed closer to 20% returns in our business, and frequently made major windfalls on individual projects, picking up an extra $100K or more due to some good management and execution.

Money in the stock market is trusting the other guy to make money for you.  No way the returns should be as good as what you could do running your own business.

MaaS

  • Stubble
  • **
  • Posts: 243
Re: Trust in the Market? Or Trust in Yourself and Your Business?
« Reply #19 on: May 23, 2017, 05:13:36 PM »
Obvious answer is both, but I get that's not quite what you mean.

I think I got this thread started off a little mis-directed, without providing the context of the quote.

The quote in the OP was more of a response to "traditional" financial advice, of saving a little bit a month (10% or whatever) until you retire at 65%, and magically, the market will have generated you enough wealth to retire.

So, he advocates using the market as wealth preservation, of wealth produced by another means (a business) rather than as the primary wealth creator.

That's no different from how the folks here think, they just pursue wealth creation through a high-income job and incredibly high savings rate for 7-10 years.

Quote
But yeah.. almost all of my profits go into the market.

Why not into growth?  Or do you not want to grow beyond a one-man show?

I follow you. I love people who bet on themselves and build things.  They're usually the ones who push us forward.  If you're smart and driven, I do believe it's the best route to wealth in the modern world (start up costs for online businesses are insanely low).

Growth also comes with negatives. I like solving interesting problems and chasing new opportunities as I see them.  I dislike managing people and delegating.  To me, employees equal headaches.

And hey... I'm shareholder likes large payouts ;)

Entrepreneurship is a little different to everyone, to me, it's a way to have fun while getting to my FIRE goals (hopefully) a bit faster.