Beware: The Revenue Razor and Return on Stress...

[MJ DeMarco]

From the Life in Fastlane newsletter...

Beware of Bold Claims and Stressful Returns...

Ever stumbled upon glittering claims like these?

• I sold $300K of X widgets in 3 weeks; here's my secret...
• My company did $4M last year; here's how you can too...
• Our real estate holdings will earn over $16,000 in rent next month...

If you ever hear or read these grand proclamations, let the suspicion creep over you.

Why?

Because they likely are subject to what I've dubbed, The Revenue Razor.


If "razors" sound foreign to you, razors are logic instruments that help you carve through disinformation, or wordsmithing designed to deceive or mislead.


You might know Occam's Razor, the famous razor that prefers the explanation with the fewest leaps of logic. Other versions include:

• The simplest explanation is usually the best one.
• When you have two competing theories that make exactly the same predictions, the simpler one is the better.

When presented with revenue or sales information, I present to you the following wisdom: 
The Revenue Razor.

When somebody claims a large number of sales, income, or revenues on a gross basis, always assume that the net profit, or bottomline, is terribly small and unimpressive.

For example, a guru can easily say, "I sold $1M in week, here's my secrets," and then he pitches you his $10K training course. While the statement "I sold $1M in a week" might be factual, what's missing is the real truth.


His profit could be $1,000 or nothing at all.


If you sold 10,000 $100 bills for $50, you'd enjoy a revenue figure of $500,000.

Impressive eh? But behind the scenes, you also lost $500,000.

What's more tweetworthy and likely to sell $10,000 coaching courses?

I made $500K in 1 week? Or I lost $500K?


Whenever you're confronted with "gross" figures, apply the Revenue Razor—the real truth underneath the hood is not impressive as you think.


I mention this because recently, a Twitter user tweeted the following:





When applying the Revenue Razor, you can bet that the actual profit underneath this seemingly grand boast isn't so impressive. One user thought so as well and asked as much.



Now let's be fair; this is no indictment of ambition. I mean no ill will here for this investing couple other than the teaching moment it provides. While I disagree with the methods, this couple is actively planning their financial future, which is far ahead of the average person.


But let's not dress up a profit of barely $32,000/year as a king's ransom.

When faced with the facts: $16,000/mo might impress many people.

$32,000 a year, a household income that is considered near poverty? Not so much.

Here's another more important consideration than The Revenue Razor itself: The Return on Stress.

This insidious beast (I've heard it called The Return on Hassle) measures the mental marathons and Herculean headaches required to squeeze out your earnings. It's not just about the glittering gold at the end of the rainbow, but the storms and mires you wade through to get there.


Are you truly willing to juggle 11 properties, 11 high-leverage loans, 11 tenants pulling you in all directions, and a never-ending carnival of toilet repairs, roof and HVAC replacements, all for a mere $2,600 a month?


Passive income? To me, this sounds like an unrelenting mental siege. The idea of owning "investments" like these gives me a big freaking headache. On the E/R Matrix (last week's newsletter) this scores poorly in the Stress Spot.


Pay close attention to the reward you're getting for your effort.

1. Is your effort and the mental bandwidth it requires on an ongoing basis worth it?
2. Is there an end game?
3. What is the worst-case scenario, its probability, and can it bankrupt you?

Passive income isn't passive if it comes with a huge mental burden.

As I mentioned on the forum, I own several million dollars in real estate, but NOT through apartments or single-family ownership, but through real estate investment trusts.


As such, I truly enjoy passive income monthly without headaches. Here is just one of my monthly paychecks: pure profit without property management nightmares.




Now consider both strategies. If we plotted the two different investment paths on the Return on Stress scale, look at the difference.


Note: This newsletter issue isn't about my REIT preferences over actual property ownership, however, if you want to read a great article on why REITs are preferable as a passive investment, hit the link for a great read.


So let me leave you with this: Your time is your most precious resource, but your mental sanity is a close second. A homeless person struggling to find their next meal might have abundant time, but the amount of stress in their daily life turns their precious time into precarious time.


Some things just aren't worth the stress.

MJ DeMarco, Entrepreneur, Author

 

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[John TenBrink]

This article hit on all cylinders! Thank you, MJ, for an excellent read and reminder that TIME freedom should be our most sought-after commodity and a precious one at that.

Yes, there are moments on our journeys when we must hustle and burn the midnight oil - it's called earning street cred and doing your time. But, as a litmus test, watch out for endeavors that continuously wreak havoc on your work/life balance and suck you mentally dry.

As MJ so eloquently put it - "
Some things just aren't worth the stress."

 

[DAL]

Brilliant MJ, so simple to see the logic behind this when it's laid out it's scary!

Off topic but had a discussion with a work colleague in a similar vein just yesterday, they bust their butt, long hours, non paid overtime working evenings and weekends, agrees to lots of travel etc, all to try and move up the ladder at work where as I pointed out I just 'potter', get paid similar amount, no stress, no time away from family, and put any extra work effort into ventures outside of my employment. His stress level is through the roof, for what, a POTENTIAL 5% pay rise, stuff that game, but as always falls on deaf ears!!

As pointed out, not worth the stress!

 

[WJK]

From the Life in Fastlane newsletter...

Beware of Bold Claims and Stressful Returns...

Ever stumbled upon glittering claims like these?

• I sold $300K of X widgets in 3 weeks; here's my secret...
• My company did $4M last year; here's how you can too...
• Our real estate holdings will earn over $16,000 in rent next month...

If you ever catch wind of these grand proclamations, let the shadow of suspicion creep over you. Why? Because they likely are subject to what I've dubbed, The Revenue Razor.


If "razors" sound foreign to you, let me acquaint you with these sharp-minded instruments. Razors are thinking blades that help you carve through information, dissecting the fat of falsehood from the lean meat of truth.

You might know Occam's Razor, the famous blade that prefers the explanation with the fewest leaps of logic. Other versions include:

• The simplest explanation is usually the best one.
• When you have two competing theories that make exactly the same predictions, the simpler one is the better.

When presented with revenue or sales information, I present to you the following wisdom: 
The Revenue Razor.

When somebody claims a large number of sales, income, or revenues on a gross basis, always assume that the net profit, or bottomline, is terribly small and unimpressive.

For example, a guru can easily say, "I sold $1M in week, here's my secrets," and then he pitches you his $10K training course. While the statement "I sold $1M in a week" might be factual, what's missing is the real truth.


His profit could be $1,000 or nothing at all.


If you sold 10,000 $100 bills for $50, you'd enjoy a revenue figure of $500,000.

Impressive eh? But behind the scenes, you also lost $500,000.

What's more tweetworthy and likely to sell $10,000 coaching courses?

I made $500K in 1 week? Or I lost $500K?


Whenever you're confronted with "gross" figures, apply the Revenue Razor—the real truth underneath the hood is not impressive as you think.


I mention this because recently, a Twitter user tweeted the following:

View attachment 50772



When applying the Revenue Razor, you can bet that the actual profit underneath this seemingly grand boast isn't so impressive. One user thought so as well and asked as much.

View attachment 50770

Now let's be fair; this is no indictment of ambition. I mean no ill will here for this investing couple other than the teaching moment it provides. While I disagree with the methods, this couple is actively planning their financial future, which is far ahead of the average person.


But let's not dress up a profit of barely $32,000/year as a king's ransom.

When faced with the facts: $16,000/mo might impress many people.

$32,000 a year, a household income that is considered near poverty? Not so much.

Here's another more important consideration than The Revenue Razor itself: The Return on Stress.

This insidious beast (I've heard it called The Return on Hassle) measures the mental marathons and Herculean headaches required to squeeze out your earnings. It's not just about the glittering gold at the end of the rainbow, but the storms and mires you wade through to get there.


Are you truly willing to juggle 11 properties, 11 high-leverage loans, 11 tenants pulling you in all directions, and a never-ending carnival of toilet repairs, roof and HVAC replacements, all for a mere $2,600 a month?


Passive income? To me, this sounds like an unrelenting mental siege. The idea of owning "investments" like these gives me a big freaking headache. On the E/R Matrix (last week's newsletter) this scores poorly in the Stress Spot.


Pay close attention to the reward you're getting for your effort.

1. Is your effort and the mental bandwidth it requires on an ongoing basis worth it?
2. Is there an end game?
3. What is the worst-case scenario, its probability, and can it bankrupt you?

Passive income isn't passive if it comes with a huge mental burden.

As I mentioned on the forum, I own several million dollars in real estate, but NOT through apartments or single-family ownership, but through real estate investment trusts.


As such, I truly enjoy passive income monthly without headaches. Here is just one of my monthly paychecks: pure profit without property management nightmares.

View attachment 50773


Now consider both strategies. If we plotted the two different investment paths on the Return on Stress scale, look at the difference.

View attachment 50769
Note: This newsletter issue isn't about my REIT preferences over actual property ownership, however, if you want to read a great article on why REITs are preferable as a passive investment, hit the link for a great read.


So let me leave you with this: Your time is your most precious resource, but your mental sanity is a close second. A homeless person struggling to find their next meal might have abundant time, but the amount of stress in their daily life turns their precious time into precarious time.


Some things just aren't worth the stress.

MJ DeMarco, Entrepreneur, Author

Before Covid, we had a Landlord's group in my area. Almost all of them were using OPM (other people's money) to buy as many residential rental units as they could. They were using the RRRR method. When they got more than 20% equity in a building, they were refinancing and buying more. That meant that everything that they owned had an 80% loan with almost no net profits or they were running at a loss I wasn't buying anything more. I was doing debt reduction because I knew that the business cycle was about to turn and possibly the debt cycle as well. (That turn in the market is predictable, but the exact moment of its arrival cannot be pinpointed.)

I actually had the leader of the group set me down to explain leverage to me. And he was very serious. I countered by trying to explain 1980 (when interest went to 22% overnight) and the early 1990s (when the Saving and Loan Associations and Trifts failed). I tried to tell them about the loan calls that the banks made on commercial loans during the 1990s -- and that included apartment loans. It all fell on deaf ears. He told me that I didn't understand RE. He had almost 10 years in the business. I countered reminding them that I had 40+ years. He walked away shaking his head telling me I was crazy and RE stupid. I was leaving all that money on the table that I could be making...

Then Covid hit. I'm fine. I saw this high-flying RE genius recently and he's struggling under his mountain of debt. Thankfully, his loans haven’t been called yet for pay downs. MJ is right. It only matters how much you have left AFTER you pay the bills... and the debt service... and the overhead.... and the repairs.... and the legal fees... and, and, and...

 

[MJ DeMarco]

To the genius who said, "But MJ, if your REIT goes bankrupt, you lose all your money!"...

First of all, REITS are secured by the assets they own. If I personally go bankrupt or lose my income, my house is still worth $5M+. So while some REITS can go bankrupt, they are usually merged or acquired by a stronger company. Also real estate assets do have book value... even an empty mall is worth something.

Second of all, REITS don't fail overnight, the erode slowly as conditions change.

Third, there are 100s of REITS to invest in, and I can choose WHICH ones to own, WHICH to avoid, and WHICH ones to sell when conditions change.

For example, I don't own a lot of REITS that have office exposure as I see this as a declining space. I do own a lot of REITS in the medical space as America (and a lot of the world) is getting older, and sicker, with no end in sight.

I have full control over the type of REITS I own, and when to exit any space -- all which can be done in a matter of seconds. Selling a SFH that needs repairs after a shitty tenant has left, can take months to liquidate. Hard Pass.

So the assertion that "you lose all your money when your REIT goes bankrupt" is just a bad, straw man argument that presumes such investments are made arbitrarily in a vacuum and then forgotten about for years.

 

[MJ DeMarco]

To the genius who said, "But MJ, if your REIT goes bankrupt, you lose all your money!"...

First of all, REITS are secured by the assets they own. If I personally go bankrupt or lose my income, my house is still worth $5M+. So while some REITS can go bankrupt, they are usually merged or acquired by a stronger company. Also real estate assets do have book value... even an empty mall is worth something.

Second of all, REITS don't fail overnight, the erode slowly as conditions change.

Third, there are 100s of REITS to invest in, and I can choose WHICH ones to own, WHICH to avoid, and WHICH ones to sell when conditions change.

For example, I don't own a lot of REITS that have office exposure as I see this as a declining space. I do own a lot of REITS in the medical space as America (and a lot of the world) is getting older, and sicker, with no end in sight.

I have full control over the type of REITS I own, and when to exit any space -- all which can be done in a matter of seconds. Selling a SFH that needs repairs after a shitty tenant has left, can take months to liquidate. Hard Pass.

So the assertion that "you lose all your money when your REIT goes bankrupt" is just a bad, straw man argument that presumes such investments are made arbitrarily in a vacuum and then forgotten about for years.

An AI follow-up per Bard which lends credibility to the idea the REIT bankruptcies are rare.

Here are some public REITs that have gone bankrupt, starting with the most recent:

* CBL & Associates Properties, Inc. (CBLQ) filed for Chapter 11 bankruptcy on November 3, 2020.
* Pennsylvania Real Estate Investment Trust (PEI) filed for Chapter 11 bankruptcy on November 3, 2020.
* Retail Properties of America, Inc. (RPAI) filed for Chapter 11 bankruptcy on February 25, 2021.
* General Growth Properties, Inc. (GGP) filed for Chapter 11 bankruptcy on May 16, 2020.
* Seritage Growth Properties (SRG) filed for Chapter 11 bankruptcy on September 10, 2020.

It is important to note that these are just a few examples of public REITs that have gone bankrupt. There have been a total of 10 public REITs that have filed for bankruptcy since 2000. (NOTE:Just 10 in 23 years? But MJ! REITS go bankrupt and you lose everything!)

It is important to remember that REITs are still considered a relatively safe investment, and bankruptcy is a rare occurrence. However, it is important to do your research and understand the risks involved before investing in any REIT.

 

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[DarkZero]

From the Life in Fastlane newsletter...

Beware of Bold Claims and Stressful Returns...

Ever stumbled upon glittering claims like these?

• I sold $300K of X widgets in 3 weeks; here's my secret...
• My company did $4M last year; here's how you can too...
• Our real estate holdings will earn over $16,000 in rent next month...

I've worked behind the scenes of many of these types of "gurus" to help them be more ethical in their marketing and make it more synced with the product. Needless to say, I've only worked with 1 where their claims backed up their results.

Everyone else has nowhere near the profit they claim. And they avoid talking about profit. Every marketing post is a just a way to keep the cycle continuing so they can get another claim.

RE gurus aside, very few are practitioners in the thing they are selling anymore. It definitely is selling shovels. And when that one loses its luster, they move on to the next thing.

They are only as good as their next "offer". Not even product. Just the "offer" so they can stay fresh and relevant in the marketplace.

It's extremely unethical and the more I've seen it the more it has made me want to get out of the industry, which I am actively working on.

MJ is spot on. The bold claims you are seeing online do not factor in

- losses
- refunds
- disgruntled customers who may not leave a bad review out of their own decency, but will also never sing the guru's praises and will definitely tell others privately not to work with guru
- the churn and burn of employees because they can't retain them due to their unethical practices, scope creep, or poor compensation (usually all of the above). I've watched employees get completely burned out and I don't blame them. This happens to nearly all of these companies.

RE gurus
Coaching gurus
Agency gurus
Trading gurus
Affiliate marketing gurus
Biz opp gurus

^There are definitely a few stand outs in those who have integrity and focus on getting results. And the only way you'll know is they've sold the same thing for an extremely long time and the testimonials truly do back them up. But most are far and few between.

Last but not least, one of my contractors told me he was recently working for an RE Guru. He said that person didn't care about client results. They just cared about selling. They only had 1 true testimonial. And it's in their team meetings that they say "client results aren't the focus. We just need to sell".

 

[MJ DeMarco]

Bump...

Remember, what one "makes" is not what one "profits."

 

[WJK]

I know that the office and commercial retail markets in RE in the USA are in big trouble. A bunch of the loans will need to be rolled over this coming year. That's a problem since a bunch of the buildings are vacant and the interest rates for loans have almost doubled. It's a hangover from Covid -- which has caused basic changes in how we work and do business.

It feels like the early 1990s in Los Angeles. That was a rough decade for the office building and warehouse RE markets in that area. It was brought on by the new invention -- personal computers -- for the office market. And on-time delivery for the warehouse market. What am I talking about? The personal computer brought about voice mail and remote working. That meant that everyone didn't have a secretary and/or receptionist -- so they no longer needed all the office space. Computers and on-time delivery meant 3 to 5 days of inventory on hand rather than 60 days of goods in a warehouse. Think of the effects on the RE market!

 

[MJ DeMarco]

I know that the office and commercial retail markets in RE in the USA are in big trouble. A bunch of the loans will need to be rolled over this coming year. That's a problem since a bunch of the buildings are vacant and the interest rates for loans have almost doubled. It's a hangover from Covid -- which has caused basic changes in how we work and do business.

It feels like the early 1990s in Los Angeles. That was a rough decade for the office building and warehouse RE markets in that area. It was brought on by the new invention -- personal computers -- for the office market. And on-time delivery for the warehouse market. What am I talking about? The personal computer brought about voice mail and remote working. That meant that everyone didn't have a secretary and/or receptionist -- so they no longer needed all the office space. Computers and on-time delivery meant 3 to 5 days of inventory on hand rather than 60 days of goods in a warehouse. Think of the effects on the RE market!

Not sure if this comment is related to my REIT commentary, but I don't own any REITS with a large commercial office exposure.

I made sure of this years ago.

I'm concentrated in housing, data, medical, and high-end retail. I do have some warehouse exposure, but very little.

 

[WJK]

Not sure if this comment is related to my REIT commentary, but I don't own any REITS with a large commercial office exposure.

I made sure of this years ago.

I'm concentrated in housing, data, medical, and high-end retail. I do have some warehouse exposure, but very little.

The problems are sectional within RE. We've seen this before -- like I said. You must know that the basic investments are solid.

 

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[Kevin88660]

It seems that those guru’s business model is to get into huge volume of business transaction and then farm for attention in order to get them to sell something, usually a course.

Even though the profit is unimpressive, the large revenue figure serves as a useful lead generator to farm for attention…hence good return on ads is what it matters for the guru.

I think there is a special case whereby large revenue or poor profits/losing money is long term beneficial.

If you are a business accumulating long term assets such as clients base or investing in productivity tools you don’t see immediate results.

Amazon and Tesla are two examples that operate with loss for years but once they turns a profit the quarter result just keeps getting better and better.

Amazon runs the classic large platform business model that uses subsidy to get more and more customers and once they get more customers they can bulk order from suppliers and gain bargaining power over their supplies to get cheaper price.

This builds a economics of scale that other players who are not as big are impossible to rival.

Get more customers, get cheaper cost per unit, sell cheaper to customer, then attract more customers. The loop just reinforces itself.

Tesla spends huge amount of money investing in gigafactories, vertical integration and die casting technology to lower the long term cost of production and be more efficient.

What is the equivalent form of that for smaller businesses and solopreneurs?

It could be building an audience first even you do not have a concrete idea on what to sell. It lowers your long term feedback loop and act assess adjust cost with trying products, instead if relying on paid ads. As well as lower customer acquisition cost.

Or use loss leaders to accumulate quality client base for future potential.

Or investing in productivity in any meaningful ways. (Ai tools).

 

[WJK]

It seems that those guru’s business model is to get into huge volume of business transaction and then farm for attention in order to get them to sell something, usually a course.

Even though the profit is unimpressive, the large revenue figure serves as a useful lead generator to farm for attention…hence good return on ads is what it matters for the guru.

I think there is a special case whereby large revenue or poor profits/losing money is long term beneficial.

If you are a business accumulating long term assets such as clients base or investing in productivity tools you don’t see immediate results.

Amazon and Tesla are two examples that operate with loss for years but once they turns a profit the quarter result just keeps getting better and better.

Amazon runs the classic large platform business model that uses subsidy to get more and more customers and once they get more customers they can bulk order from suppliers and gain bargaining power over their supplies to get cheaper price.

This builds a economics of scale that other players who are not as big are impossible to rival.

Get more customers, get cheaper cost per unit, sell cheaper to customer, then attract more customers. The loop just reinforces itself.

Tesla spends huge amount of money investing in gigafactories, vertical integration and die casting technology to lower the long term cost of production and be more efficient.

What is the equivalent form of that for smaller businesses and solopreneurs?

It could be building an audience first even you do not have a concrete idea on what to sell. It lowers your long term feedback loop and act assess adjust cost with trying products, instead if relying on paid ads. As well as lower customer acquisition cost.

Or use loss leaders to accumulate quality client base for future potential.

Or investing in productivity in any meaningful ways. (Ai tools).

I'm in RE. My mobile home park was losing money like crazy when I took the title 25 years ago. Now it's a cash cow. I've had 3 cash offers on it over the last year which I have not accepted. It took years of work and attention to build it up. No, it's not scalable. Yes, it is a productocracy. Now it takes a lot less effort to manage.

I think of starting a business like pushing a car that is parked. It takes a lot of effort and energy to get it rolling. Once it is moving, it takes a lot less to keep it going.