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EK 101 – The Core Three
Business Rules – Move Forward
Business Organized in 7 Rules:
80 / 20 Principle
- Extra Tip: Follow the Money $
Finance Recap – Clarity of Resources
Finance Down to 7 Concepts:
Price v Value
“The First Law states that an Object either remains at rest or continues to move at a constant Velocity, unless it is acted upon by an External Force.” – Newton’s First Law of Motion
Here at Economic Knight we follow Simple Rules so there is always Clarity. The Universe has Laws, and life becomes easier when you accept this premise. If you know the Rules, then you can work out how to best succeed within them.
What is your Big Picture? Write down your Objectives, and Goals and review it periodically to confirm you are on track. With some Knowledge of the key areas, and how they fit together, it helps Create a better Strategy.
Before you begin, ask yourself 3 Qs:
- What are the Rules?
- What are you trying to Achieve?
- Do your actions move towards your Main Objective?
Let’s Get Started…..
THE CORE THREE
Game Plan = Offense/Defense
- Makes Money whether the Market goes Up or Bown
- Has Tax Protection
- Locks in Gains
- Protects your Principal
The Power to Say ‘No’ is rare, but essential to success. It is better to aggressively pursue the few right opportunities (ones of low risk and high uncertainty), then waste energy on too many pursuits. If you were an Investor looking at your business from the outside, would you put money in? Are you in an Industry that is Growing? Don’t be afraid to change opportunities if the current one is not producing good returns.
Architect = Acquire Assets
- Act as Security for Collateral to borrow money
- Hedge against Inflation vs. holding cash that devalues over time
- Provides Real Diversification in any economic climate by owning different Asset Classes
Government Policies create Inflation, which devalues Cash, so it is not not the best Asset. Simply put, Cash does not increase in value, so over time you buy less with it. You actually lose money as inflation rises, because of the low interest rates banks pay on deposits (they are lower than inflation). Real Diversification is created by owning different high quality Assets, and you only need a few.
Endgame = Exit Strategy
Business Professionals need a long term plan, to enhance their options. We believe You should be able to Exit the Workplace on your Own Terms, not someone else’s. Most professionals have not given enough thought to their future, particularly an Exit Strategy.
You’ve Worked Hard for what you’ve Earned. Now you need a Tax Control Plan for your Wealth.
Tax Free Matching Strategy:
- Grows your Wealth 60% faster
- Protects your Principal
- Provides You a Tax Free Exit at Retirement ($0 Taxes)
We help them Create an Exit Strategy, even if they decide not to sell (or leave) their business. You still can get the benefits of the strategy we helped create with you. This is now your ‘backup plan’.
If you own a Business, it is likely your Biggest Asset. You have 1 stock. This is probably too much concentration, and may lack Real Diversification. Likewise, if you work at a business, and your retirement is mostly tied to that business (and the management team), you are lacking a backup plan. A proper Exit Strategy gives you the flexibility to leave that job, or operate your business in your best Long Term interests. You can make the Decision to stay because you want to.
We Can Help
Just like the Laws of Physics, there are Business Rules. You can say you do not believe in gravity, but Physics will disagree. Below, we review some good rules to understand that will move your business forward. This is Micro Economics (the Little Picture).
Business Organized in 7 Rules:
- Self Awareness
- Associate With
- 80/20 Principle
- Cash Flow
Self Awareness –
What are your core beliefs? Make sure all actions align with them. What drives your success? What is the Currency of your Job? In the consulting world, it is the Client’s Trust. Understand simple facts like this, and never lose Focus. You need to know yourself, both your strengths and weaknesses to succeed. Build on your strengths, what you do well. Outsource your weaknesses. Hire people to do what you are not good at (or interested in).
Serious people who are Goal Oriented understand their success is measured by what they sacrifice to achieve it. Let the important people in your life know you appreciate them. Common Sense is not over-rated. Ask yourself constantly: ‘Does this make sense?’
Associate With –
Who is in your inner circle defines what you are, or will become. In the HR world, they call this, Human Capital. Who are your Partners, Friends, Team, Contacts, Advisors, and Clients? The better the people you associate with, the better you do in life. You need people around you who make your life easier. They continually Create Energy, and make you stronger and smarter. This creates a type of Network Effect in your life. Basically the more quality people you spend time with, the better everything gets.
Avoid anyone who lacks common sense, and is not self aware on top of that. They will drain your energy, time, and resources. If associating with the right people rises you up, then the wrong people will drag you down. Avoid Silos, or Feedback Loops, where the people around you just agree with you all the time. You need Advisors who will tell the emperor he has no clothes.
80/20 Principle –
This is the Principle of Focus. Understand that 80% of your outputs will come from 20% of your inputs. Concentrate on that 20%, and disregard what is not working, to maximize returns. Every Decision flows from this. When you know your Priorities and what works, you shed the dead weight.
Learn to ‘Say No’ often. There are usually few opportunities worth pursuing, and most offers are distractions. They are the 80% that you need to ignore. Differentiate between the Micro vs the Macro. In communication, use the Theory of Restraint. Say More with Less, to be concise with your words. Learn to Respect Time, both yours and others. Act with purpose, and let others know this is how you operate.
Over two thousand years ago, the famous Greek Mathematician Archimedes discovered the secret behind the lever and declared: “Give me a place to stand, and I will move the world.” Know the Dominos in your industry that when tipped lead to big gains. These levers become invaluable in having exponential growth.
Change is Enviable. Things do not repeat as much as you think, they just seem similar. Understand that whatever industry you are in could be altered drastically. It is a kind of Chaos Theory, where a small agent is introduced and has massive impacts. These Black Swan type events are rare but powerful. Entire industries get wiped out by new technologies, or one big player who takes so much market share.
The Innovator’s Dilemma is when a successful business sees the market is changing, but does nothing because it will disrupt their current profitable operation. The dilemma is, if you do not disrupt yourself, a competitor comes along and does it anyway. Pay attention to the Future Trends, and embrace a ‘Crystal Ball Theory‘ of watching for the oncoming technology Train. If you can anticipate it, you adjust and evolve. If not, then you’re just Blockbuster, or Kodak – who had the digital camera, but passed because it would compete with their film business.
Block out time on your calendar and label it ‘Think Time’. If possible copy Bill Gates, and spend time every year alone with no distractions just thinking (a week, or maybe a weekend). The process of growing anything (a business, a fund, or a tree) will take longer than you plan for, so just be in a Long Term Mindset early. Then Plan, Experiment, and Research, until your Strategy is solid. Test your plan often, build on strengths, and re-evaluate.
Your Education is ongoing, so have the habit of reading whatever you need to about your industry. If you are not a reader, then use Audible, podcasts, YouTube, etc. for your info. SWOT analysis (strengths, weakness, opportunities, threats) to document where you are at. What gets measured, gets monitired, aka Benchmarks.
Create Models to follow for decision making. Use Visuals for company training, marketing, and content. Develop Systems for everything you handle in your business. There are numerous items that will repeat, and better to have the process set up early. Given the Information Age we are in, there is probably someone who faced your problem before. Do the research and learn how they overcame it.
Build Habits that provide compounding benefits over time. Be Adaptable to problems, as they can supply Opportunities as well. Clients need someone to solve their problems. Always be a resource, and Provide Value. The More Value you give, is in a direct relation to your Gains. You want to be someone who has the Answers.
Cash Flow –
Cash Flow is critical, you need to bring in money no matter what industry you are in. Sales must be greaterer than expenses. Until your sales are there, you need a backer (even if it is yourself). A business has to stay solvent, to Thrive in the Future. The majority of business’ success relates back to their Sales & Marketing Efforts. If you can do these well, then the rest can be done by someone else in your org.
Most Successful Entrepreneurs are the best salesman in their company. No one else can Sell Your Idea better than you, nor will they care as much. Create an Automated Way to get your Message out. Distribution of Products, and Providing Service easily, leads to Happy Clients – these are the last parts.
Extra Tip: Follow the Money $
Watch Where the Money is Being Invested. What Industries are companies investing in? Who is backing the project? What are Smart People paying attention to? Don’t concern yourself too much with what they say – Follow their Actions. People say they would buy it, but do they? Where do they put their resources, because people vote with their money.
To Get the Deal, You Have to Know the People in the Deal.
Information + Contacts = Everything.
CLARITY OF RESOURCES
‘Know what you own, and know why you own it.’
― Peter Lynch, Retired Investor, from his book ‘One Up On Wall Street’
If you have any type of investments (retirement), or you run a business, it’s critical you know some Finance Concepts. This is like a review of your Money Owner’s Manual. Read the manual to Increase your current Money Stockpile. Let’s start with a Recap.
Finance Down to 7 Concepts:
- Price v Value
- Mean Reversion
- Capital Allocation
- Credit Capacity
* The definitions were care of Investopedia
Price v Value –
Understanding the difference between the two, when you Analyze Assets. ‘Price is what you pay (arbitrary), but Value (fundamental) is what you get’ – Warren Buffett. An investor needs to understand value, and be able to leverage the difference between price and value. You want to find stocks of good companies selling at a ‘below market’ price. A company may be good, but their stock is only good at a certain price. If it is overvalued, then you will not make a good return.
Ben Graham‘s classic book ‘The Intelligent Investor‘ has 2 chapters that should be mandatory reading – Ch. 8 (on Mr. Market), and Ch. 20 (on Margin of Safety). Warren Buffett based his entire investing career on this book, paying particular attention to the brilliance of these 2 investing essays.
Mr. Market (Ch. 8) – Graham calls the Stock Market aka Mr. Market, and says he is an emotional fellow. He will show you vast fluctuations on the stock price, and you must not get emotional when analyzing if the offer is good or bad. Because Mr. Market is so emotional, tomorrow he could offer a different price. Graham was pointing out, that the market is about people, who are buying and selling these stocks, and their actions are not always rational. This provides opportunities and pitfalls. Do your homework and determine the fair value of a stock, then buy when the market offers your price.
Margin of Safety (Ch. 20) – Because Mr. Market’s prices fluctuate, combined with the fact that your analysis of a stock may be off (or the economy could take a dip), you need to have a ‘Margin of Safety’. This means you have a 20% buffer (pay 20% less) from what you will pay. Use calculations to determine the price you will pay, estimating the potential of a stock and what yield you may get. Investing (like Business) is not a ‘Hope’ exercise. You write down your analysis and make judgments without emotion (see Ch. 8).
Mean Reversion –
Mean Reversion, or reversion (or regression) to the mean, is a theory used in finance that suggests that asset price volatility, and historical returns eventually will revert to the long-run mean or average level of the entire dataset.
Prices do not go up forever, they tend to level out over the long term. This is why so many investors monitor the 52 week High / Low average of a stock, and how it is trailing. Many stocks will go up 5, or 10 – 20% in a year, and then go back down – whether because they are cyclical, a ‘hot buy’, scandal with the Co., or market circumstances, etc.
Market Cycles, also known as stock market cycles, is a wide term referring to trends or patterns that emerge during different markets or business environments. During a cycle, some securities or asset classes outperform others because their business models aligned with conditions for growth. Market cycles are the period between the two latest highs or lows of a common benchmark, such as the S&P 500, highlighting a fund’s performance through both an up and a down market.
Market Cycles, are common as economic phases rise, then fall. Think of this like a like a Pendulum, and pay attention to how they are moving currently. A great example is a Recession, where the market is down for 6 to 10 months, and stocks are all falling. As the economy comes out of the Recession, there are many opportunities for buys of the stocks of good companies that were down from the Recession, but now are rebounding.
Capital Allocation –
Capital Allocation is the process of distributing financial resources to different areas of a business to increase efficiency and maximize profits.
A Sunk Cost refers to money that has already been spent and which cannot be recovered. In business, the axiom that one has to “spend money to make money” is reflected in the phenomenon of the sunk cost. A sunk cost differs from future (or regular) costs that a business may face, such as decisions about inventory purchase costs or product pricing.
Sunk Costs also mean that the Money $ used on a bad investment is lost. Don’t try to ‘chase it’ to somehow recover and get even. Instead, just write it off, and move on. It is better to use the New Money $ on better investments. Where to Invest your money $ is pivital to Capital Allocation. Simply put, learn to Control Your Capital and decide wisely what Opportunity (Cost) it should go to be as efficient as possible. This is the intersection of scarcity and choice.
Opportunity Cost is the loss or gain of making a decision, the forgone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. Famous Phrase – “idle cash balances represent an opportunity cost in terms of lost interest”
In Stock Investing – Beware the Zombie Co.s in the S&P Index. These are companies that are not profitable, or growing (may even need a Bailout). They are just treading water, and paying their interest on debt, but not their principal. In the current S&P index, it is estimated that about 20% of companies are Zombie Co’s whose main investment comes from people buying the whole Index. Unfortunately another 30% of the Index are bad companies that are either are stagnant, or on their way to Zombie status. Maybe 10 – 15% of the Companies (Stocks) in the Index (50 – 75 Co’s) are really good to exceptional and should get your Capital.
Albert Einstein said, “Compound Interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” This concept goes both ways. Good Investments can lead to exponential growth of your assets. Conversely, Bad Investments can fail quicker than you think, and creates magnitudes of losses.
* This also applies to so many other aspects of Life. Good Decisions can compound in the Positive direction, while Bad ones can set you back years. Good Relationships and Partners can also provide Good compounding results, where as poor associates, well you understand – See Business Rules Section and ‘Associate With’
Leverage or Financial Leverage is one of the greatest way to Multiply Wealth. In essence, it helps you Create More Wealth with Less Capital. Understanding Leverage, and when to use it properly can magnify gains. You are looking for Multipliers, types of Levers (see 80/20 under Business Rules) that propel you in a Positive trajectory.
Risk is defined in financial terms as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment. Quantifiably, risk is usually assessed by considering historical behaviors and outcomes.
Many Investors combat this by Diversification across Different Asset Classes. This way not all of your Investments are concentrated in one Asset class. Over the long term, Assets that appreciate are the best way to grow wealth. These include Stocks, Real Estate, CV Life Insurance, Alternative Investments, Cryptocurrency and Commodities like Gold. Cash Flowing Businesses can be your largest and best asset.
There are two main categories for Risk – Systematic (the market, or economy) and Unsystematic (specific to a company or asset):
Types of Systematic Risk – Market, Financial, Liquidity, Political, Inflation Rate, Interest Rate, Currency
Types of Unsystematic Risk – Business, Credit, Country
Credit Capacity –
Credit Capacity is your ability to Borrow Money, aka debt or loans, which leads to Access to Capital. Lenders check the Five C’s of Credit to determine the likelihood you can repay – Capacity, Capital, Collateral, Conditions, & Character.
Whether you are running a business or have an investment opportunity, you may need cash or loans. Better to borrow $ before you need it, or establish credit lines as a backup plan. It helps to have Assets for Collateral (security put up to back the loan in case of default), or to improve your credit resume. Remember the old axom – ‘Dig the Well before you get Thirsty.’
Having access to Capital is crucial for 2 Reasons: 1. To Acquire Assets at Good Prices, and 2. To Take Advantage of Opportunities.
Leverage or Financial Leverage is one of the greatest way to Multiply Wealth. In essence, it helps you Create More Wealth with Less Capital. The key to using Financial Leverage, is to do this safely by using Low Risk Assets. You Borrow at a Low Rate, and Invest at a Higher Rate using OPM (other people’s money, aka – Loans). The analogy is similar to a real estate investment deal.
Read, Study, Understand Real Returns –
- ROI – Return on Investment
- ROA – Return on Asset
- ROE – Return on Equity
All Investments ideas should be written down, researched and scrutinized for hours, or days. What are the chances the investment will fail? Estimate probabilities of success, and potential timelines to achieve it. What are the Market forces that could delay (or create) the return? You have to be able to explain concisely why you made the investment and what your theory is. Otherwise you are just ‘Hoping’ it will happen.
ROI (Return on Investment) is a financial metric that is widely used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. It is as useful in evaluating the potential return from a stand-alone investment as it is in comparing returns from several investments.
Personal Financial Statement (PFS) – Fill out a PFS every year to get the full picture of your assets, and liabilities. This will keep track of your overall Net Worth, and confirm it is increasing. Keeping an updated PFS allows an individual to track how their financial health improves or deteriorates over time. These can be invaluable tools to analyze your financial situation or apply for credit such as a loan or a mortgage. Often if you take out a business loan, there may be a personal guaranty needed, and the lender will request a PFS.
EBITDA – or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances. EBITDA, however, can be misleading because it strips out the cost of capital investments like property, plant, and equipment.
This metric also excludes expenses associated with debt by adding back interest expense and taxes to earnings. Nonetheless, it is a more precise measure of corporate performance since it is able to show earnings before the influence of accounting and financial deductions. Simply put, EBITDA is a measure of profitability. This is commonly used in Private Equity to value the whole company.
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We work with Entrepreneurs,
Business Owners, Investors,
and High Level Executives
to improve cash flow, pull
Equity out of the business,
and Grow overall Net Worth.
We Can Help You:
Create Your Exit Strategy
Acquire More Assets
Unlock Business Equity
Control Your Capital
Retain Top Talent
Expand Your Options
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Retire with Better Terms
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