The Seven Sources of Wealth

I spend a lot of time thinking about wealth creation. I like to find common themes and structures that can generate wealth. After thinking about it for some time, I believe I have identified the seven structural sources of wealth. These are business structures or transaction types that generate “profit,” which is a precursor to (legally acquired) wealth. As you go through the list, you may observe that some businesses actually combine two or more of these structures to generate wealth.

What is the purpose of knowing or understanding these seven sources of wealth? I think it is the first step in addressing a much more important question: which wealth structures benefit humankind economically the most? That is an important question, especially from a public policy standpoint. For if some of these structures benefit people more, but governments give favorable treatment to the others, then we are probably not maximizing our economic potential.

Here are the seven structural sources of wealth:

Product leverage Create it once, sell it over and over. Items that fall into this category include Microsoft Windows, Harry Potter novels, Toyota Prius and iPads. Note, that a discussion about structural sources of wealth does not include things like cost of goods sold or degree of profitability. Surely software, with its essentially zero cost of goods, will be, percentage wise, more profitably than manufacturing an automobile. But both can generate wealth by leveraging a single creation.

Financial leverage Take a percentage of other people’s money. Items that fall into this category include real estate and mortgage brokers, certified financial planners, mutual funds and hedge funds, as well as run-of-the-mill banks. As has been clearly demonstrated by these financial fiduciaries, a fortune can be generated taking a tiny percentage of a very large amount of money.

 

Service leverage Create is once, deliver it over and over. Items that fall into this category include Starbucks, H&R Block, Salesforce.com and even utilities. With legacy services, leverage is costly to scale up. Every time you want to open a Starbucks, you have to hire an entire store’s worth of employees. The exciting development in this category today is software as a service (like GoToMyMeeting.com) where you can scale up the service without having to staff up proportionally.

 

High hourly rate Charge a lot per hour. In this category, most people think of doctors and lawyers, but entertainers, professional athletes and subject matter experts also fall into this category. When Tom Cruise makes $10 million for a movie, he works an unpredictable, but ultimately limited, number of hours, which most assuredly translates to a high hourly rate.

Overrides Get a percentage of what is produced (especially by people below you). Items that fall into this category include partners at law and accounting firms, multilevel marketing and franchising. Even most sales managers have their compensation tied to the production of the sales people below them. This is different than financial leverage in that overrides are based on a percentage of what is produced, rather than a percentage of an amount of money.

Mark up Buy it at one price, sell it at a higher price. Certainly retail companies like Amazon and Wal-Mart fall into this category. But so too do many investing and arbitrage businesses. Private equity and house-flipping can also be included in this category.

Assets Any asset that can generate cash. Items in this category include gold mines, oil wells, commercial real estate, farm land and even securities. Any asset that generates more money than it cost to purchase can be source of wealth creation.

There you have it. The seven sources of wealth. How do you want to make your fortune?

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The Real Secret to Healthy Eating

If you are expecting some super new diet, you can forget it. I could not possibly tell you what you do not already know: like how you should eat more fruits and vegetables and less carbs. That salmon and broccoli make for a healthier meal than anything you can buy at McDonalds™. You already know that, so why are you still eating food that is so unhealthy? That is the secret I am going to share with you.

The situation we have today is that unhealthy food, unfortunately, is cheaper, faster and more convenient than healthy food. And in most cases it tastes better too. What that means is if you wait until the last minute to figure out what to eat for dinner, you are going to eat unhealthy. If you wait until you are starving before you decide on your next meal, the only fast options are unhealthy ones. The fast food industry has made a great deal of financial investments into technology that prepares and cooks unhealthy food quickly. The same cannot be said about healthy food. Can you think of a single drive-through restaurant in America that offers fresh juice, or steamed vegetables, or grilled fish?

If you want to start eating healthy, for better or worse, you are going to have to plan your meals out in advance. And not just plan them, but purchase the ingredients and prep them too. You are going to have to think about eating long before you are hungry if you want to eat healthy. That is the secret to healthy eating. It takes way more work than unhealthy eating. Lazy people are not healthy eaters.

In my experience, there are two keys to eating healthy on a consistent basis. First, the planning, the purchasing and the preparing of your food must become part of your weekly ritual—something you don’t even have to think about. For me, healthy eating begins Saturday mornings at 7:30 am when I go to the local farmer’s market. I buy as many fruits and vegetables as I can carry. And on the way home I stop by the local supermarket and buy those fruits and vegetables I cannot get at the farmer’s market. It is my ritual—I don’t even think about it. By 9:00 am Saturday morning I have acquired my weeks worth of fruits and vegetables. Since my breakfasts consist of fresh juice and cantaloupe, I do not have to give breakfast another thought for the week. And since dinner is usually just a combination of one vegetable and some healthy protein (like chicken or fish), all I have to do is stop on the way home for dinner to pick up the protein for that night.

The same goes for snacking. Plan your snacking by purchasing healthy snacks and you won’t find yourself wondering over to the vending machine.

The second key to consistent, healthy eating is to find a handful of foods and recipes that work for you and stick to them. Once you get this “base” menu sorted out, things you enjoy eating multiple times a week, then you can mix it up by experimenting, but you must have a base of foods you know and enjoy to fall back on. There is no need to “gourmet it up” to eat healthy. Find a couple of dinners, a couple of lunches and a couple of snacks that you really enjoy and start there. Trying to eat healthy by eating foods you don’t enjoy will not work for very long.

How am I doing with my healthy eating? Good, but I can do better. I eat mostly healthy meals, but I still eat unhealthy ones too. And the only thing I know for sure is that the healthy meals I eat are planned and the unhealthy ones are not. So, until someone opens a healthy drive through, with fast, delicious, healthy food, we have to take responsibility to arrange for our weekly food intake in advance. A hard habit to form, no doubt, but probably less painful than testing your blood sugar five times a day.

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What if There Were No Health Insurance – For Anyone?

I just love to engage in thought experiments. To think about scenarios that will probably never happen, just for the fun of being able to consider what the consequences might be (without, of course, actually having to experience them). My favorite thought experiments are those that most people would consider impossible, could never happen, don’t even think about.

So, for today, I ask you to consider what you think would happen, if, starting tomorrow, there was no health insurance for anyone. Would the human race die out within in year for lack of medical care? Would our life expectancy suddenly plummet? I am not so sure.

As a brief background, health insurance as we have come to know it in America, is less than 100 years old. Now that is partly due to the fact that 100 years ago, for many illnesses, there was little that could be done for most people anyway, so there was little purpose to insuring against them. But the fact remains: recorded history is about ten thousand years and we have survived 99% of that without health insurance.

One consequence of no health insurance would quickly become a fact: you would have to pay for your own medical care. I think we can agree on that. Two more consequences would quickly follow from that. First, medical service providers would have to tell you the price they charge, unlike today. (Does anyone know what their last doctor’s appointment cost?)  Second, there would be a built-in incentive to be healthy. More health would mean less cash out of your pocket to pay for medical services. So far I like it.

Imagine doctors having to post their prices on a web site. Couple that with the on-line recommendation ecosystem that would evolve and you would actually have market forces keeping the price of medical services in check. Good doctors could charge more; inferior doctors less, as it should be. And as crazy as this sounds, it is already happening.

How about pharmaceuticals? I can think of two consequences of having to pay for prescriptions drugs out of pocket. For non-life threatening diseases, there would be tremendous downward market pressure on the price of the medication. Just like fine jewelry you can live without if it is too expensive, so too would it be with prescription drugs you can live without. Of course with lower profit margins from downward market pressure, there would be less incentive for pharmaceutical companies to develop these drugs in the first place.

With life threatening drugs, the prices would remain high (at least during the patent protection period). Now for people of means, this would not be a problem, but it certainly would be for those who could not afford it. And for very rare, life threatening diseases, it is doubtful that the drugs would ever be developed. This is in contrast to today, where drug manufacturers can develop drugs for rare, life threatening diseases because the cost of the extremely expensive medications is spread across the entire insurance base.

Another extreme impact of the no insurance experiment would be the redirecting of over $400 billion dollars of health insurance premiums. Without health insurance premiums to  pay, there would exist about $1200 per person per year in the US to pay for direct medical expenses. Not enough to cover major surgery, but plenty of money to accommodate a person of normal health. And with the downward price pressure that would surely exist, the $1200 would buy a lot more medical service than it does today.

As for individuals, their medical care would ultimately depend on their income. People of means would still get the very best care, as they do today with health insurance. There would be little change for them. For people with no means, there would be very little change for them also. They cannot afford medical insurance today and they would not be able to afford medical care if there were no insurance tomorrow. They would continue to be recipients of some sort of pro bono medical care.

As for those in between, the situation is not so straight forward. Some people would learn to save for a medical rainy day. Some would forgo necessary medical care they did not want to pay for. Some would go far into debt to pay for necessary medical care. Perhaps purchasing co-ops would spring up to facilitate bulk purchasing of medicine. And end-of-life care would certainly change. People would be forced to make economic-health tradeoffs toward the end of their life.

Finally, we have to consider the doctors. Would they be better or worse off? It probably depends on the doctor. The very best would continue to do well, the others might struggle. How about their compensation? It would be determined by the free market, just like every other non-regulated good or service. But there is one advantage all the doctors would love: no more medical billing headaches. No more rejected medical claims, no more resubmitting medical claims multiple times, just cash on the barrel. They would get paid faster and more predictably. I wager to guess most doctors would like that.

This topic is far too complex to cover in a single blog post, so this was just meant to stir the pot a little. I would like to hear your thoughts on the prospect of having to pull out your credit card to visit your doctor.

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There is Always a Plan B

Whenever you set out to accomplish anything, whether you know it or not, you have a plan. It may not be written down anywhere—it may just be in your head—but you have a plan: a series of steps you think will accomplish your goal. This plan, the first one that pops into your mind, is called Plan A. Plan A is your best guess as to the way to get what you want. Unfortunately, as you probably know from experience, Plan A rarely works out so well.

I cannot think of a single instance in which a person accomplished something extraordinary using Plan A. I am sure there is a reason for that, I am just not sure what it is. Fortunately, there is always a Plan B. Plan B is the plan you use after you discover how ineffective Plan A is. So, if Plan A is so frequently ineffective, why not just skip it and go right to Plan B? Because Plan B is the plan you employ after you have learned something: why Plan A does not work. It is that incremental knowledge and experience which makes Plan B more effective.

That Plan B is more effective than Plan A should come as no surprise to anybody. What is surprising though is the unyielding devotion some people have to Plan A. They confuse persistence with insistence.

You want to accomplish your goal. You know that few great things are achieved without persistence. You are determined to persist until you achieve your goal. So you do. But being persistent does not absolve you of the responsibility to run with your eyes open and remain flexible as you traverse the path to your goal.

More people have wasted more time and energy in a dogged determination to stick to Plan A and “see it through.” You may feel that switching to Plan B in mid stream somehow shows a lack of persistence. But it doesn’t. Persistence with your goal is fine; persistence with a hopeless plan is foolish. Persistence without flexibility is a formula for frustration.

The secret to success at anything is how quickly you adopt Plan B. Suppose you have been searching for a job by submitting one online resume after another and it has not resulted in a single interview. It is time for Plan B. You may not know what works, but you sure as heck know what doesn’t, so try something different. Now!

Starting a businesses? Trying to lose weight? Define your goal and remain persistent. But never forget, there is always a Plan B, so get to it.

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Negative Consequences – The Source of Our Survival

Did you ever wonder why sticking you hand in a raging fire hurts like hell? Because if it didn’t, we (the human race) would not be here. If humans had ever learned to blunt the pain caused by fire, we would have perished long ago, consumed by fire we did not fear. In that respect, the negative consequence of putting our hand in fire, extreme pain, is actually the source of our survival. The short-term pain actually produces a long-term benefit. Viewed in this way, a certain degree of pain is a good thing. It makes us smarter, stronger and assures our survival. But what does that have to do with our lives today? Everything.

As things turn out, human beings hate pain. We will do almost anything to avoid it—it makes sense. We hate experiencing pain so much, we may even go out of our way to make sure other people avoid it. The problem of course is that when you enable someone to avoid pain you are unwittingly stealing from them the opportunity to get smarter and stronger. When our government enables you to collect 99 weeks of unemployment, their intention is to help you avoid the pain (of being unemployed). What they are unintentionally (or unknowingly) doing is stealing from you the chance to become self reliant.

When you make a mistake, it should hurt. When you are let go from your job because you have not kept your skills up to date, it should hurt. These short-term pains lead to many, invaluable long-term gains. They make you smarter, stronger and assure your survival. When we shy away from the pain, or some other party enables us to shy away from it, we actually endanger ourselves, like blunting the pain from the fire. Yes, you will not feel the pain of the fire if I numb your hand, but because of that, you will ultimately be consumed by it.

It is not just individuals that can blunt the pain—businesses do it too. When a business makes a bad decision that jeopardizes the business, it should hurt. When AIG made those terrible business decisions and it was deemed “too big to fail” by our government, they were blunting the pain of the fire. We avoided short-term pain, but at what price? We did not become stronger or smarter, and because of that we shall almost certainly go thought it again.

Every action has consequences. Do something good and something good usually happens as a result. Eat healthy and exercise, eventually your weight and cholesterol go down. Attend college and get a marketable degree, and you are more likely to find yourself employed. Conversely, do something stupid and sooner or later, some negative consequences are bound to occur. The problem is not the negative consequences themselves, for they can serve to strengthen us. The problem occurs when we, by our own  doing or through some external source, attempt to blunt the pain to avoid the short-term consequences.

The moral of the story is that as unpleasant as short term pain maybe in your life, it is necessary if you ever expect to become self-reliant. Do not shun from it. Embrace it and let it drive you.

 

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