Book Club #11: What I Learned from Losing a Million Dollars, by Jim Paul

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Million dollarsFrom the title, What I Learned from Losing a Million Dollars, you immediately get that Jim Paul has learned his lesson.

Not only did he lose a lot of money, but he took the time to write a book explaining to you the personal shortcomings that led to that disaster. While it might not immediately sound like a business book, it very much is.

Most might come to the book by a reference in Nassim Taleb’s Black Swan, in which he refers to Paul’s book as one of the most insightful books on investing he’s ever read.

The book is divided into two parts, story and analysis, and at just under 200 pages, is something you could easily finish on a plane ride.  

In the first part of the book, Jim describes his time as a broker and his love for money. He became quite successful before losing it all in the market. That’s not an unusual story. But what happens next is Paul’s journey to understand why he lost and how he can make things right.

People often lose because of psychological factors such as:

  • Personalizing the market and their positions (we confuse “wins” with “being right”)
  • Internalizing what should be external losses (internal losses affect us emotionally, whereas as external losses can be analyzed dispassionately)
  • Confusing the different types of risk activities (there are investors, but there are also traders, speculators, bettors, and gamblers. Are you consistently one of these or do you occasionally slip into other roles due to emotion?)
  • Making trades with the crowd (investing in something because everyone else is)

One of the biggest lessons from the book is one that was very much underlined in Tony Robbins’ recent book on money: risk mitigation. There are lots of ways to make money in business and the market, but rather than just taking risks the most successful people excel at judging, minimizing, and controlling risk.  

“Learning how not to lose money is more important than learning how to make money,” Paul notes.

The book is one of those rare reads in investing that manages to both be interesting from a personal story side while giving you practical advice about how to trade and invest better. This, of course, matches well with how to run a business better.  

Know Your Broker: Jerry Meinert

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Jerry-Meinert

Jerry Meinert

In this occasional series we will share profiles of our team here at Apex so you can get to know the men and women that make us best qualified to help you buy or sell a business.

“You can’t make this stuff up!” Jerry says when asked about “war stories” in the business brokering world.  

While Jerry has been a broker for five years, he was a business owner for 33 and he uses the exit of that business to inform how he advises his clients.

Jerry was in the general construction business, both in design and build. Because of that, he was able to see seven quarters ahead of time what was going to happen in 2008.  

The challenge was that he was tired and wasn’t willing to negotiate on the deal when an opportunity to sell came up. Instead of taking payments over a period of time, he insisted on a cash-up-front deal and the opportunity dissolved.  

“I should have been more patient. Period,” he reflects.

He brings that patience, also honed by raising two daughters, to bear on each of his transactions, and uses it as a watchword whether he’s dealing with a buyer or a seller.

“What is perhaps most satisfying for me is helping qualified and motivated buyers find the right match with the opportunity to control their own destiny and live the dream of owning a business. That spark and fire is exciting to see and I’m able to use my background as a business owner across decades to help get them ready for that next step.”

Case Study #11: Be Prepared to Walk

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walkBefore Jeff Hoffman became a cofounder of the Priceline group of companies, he built Competitive Technologies, which was one of the first business intelligence companies in travel. He’d had a suite of products that would help companies manage and reduce travel expenses.  

He got his first break with Exxon-Mobil, which spent $40M USD annually on air travel alone. He knew that such a large company wasn’t simply going to offer money to an unproven startup, so he asked for an office and a negotiated percentage of savings (much like how freight auditing works).

He saved Exxon a lot of money and went on to add other features which were on a monthly subscription plan. He went from no revenue to $5M and was at $12M by Year 3.

It wasn’t long before he and his firm got the attention of the biggest player in the space by far, and that was (and is) American Express.

They reached out and asked to do a licensing deal, as some of their clients were asking for products that only Competitive Technologies was offering. The speed of adapting and ability to change had beaten out the nearly infinite money and resources that AMEX had.

But Jeff knew that licensing to AMEX would kill his business, and so he countered with an offer to sell…lock, stock and barrel. While AMEX was initially a bit shy about the idea, Jeff went “on offense” and started calling Thomas Cook and other competitors to stoke the fires with AMEX.  

He also went to a tradeshow that he’d previously not planned on attending, acquired the booth across the way from AMEX, and got everyone to come by the booth…friends, clients, everyone. Later on AMEX would tell Jeff that the idea of losing a deal to a competitor, as well as seeing the popularity of Competitive Technologies at the tradeshow, were what moved them from “interested” to “serious” in the acquisition process.

Jeff even went “on offense” with his M&A firm, as he couldn’t afford their full retainer at the time and offered them a kicker based on the final outcome of the deal in addition to some cash up front. One of his largest investors also offered to add a travel agency he owned into the deal as well so the total deal was around nine figures.  

But, as they entered negotiations, it became clear that AMEX normally did 3-year earnout deals on acquisitions and Jeff simply wasn’t going to take that deal. When this issue became a sticking point in the deal he started to reach back out to competitors and again went “on offense,” at one point literally getting up from the negotiating table at the hotel and saying, “We don’t think you’re serious, and we’re going to move on to pursuing an acquisition by one of your competitors.”  

He and his team walked out and he turned to one of his mentors (also the largest shareholder) and asked, “What now?” …“We’re going to walk to the hotel, but they will call us before we make it there.”  Sure enough, AMEX called him while he was still on the sidewalk, and they closed the deal.

Obviously most of us aren’t going to deal with AMEX nor are we going to consider walking away from a nine-figure deal. But the lessons are there for us to apply in our own circumstances:

Innovation – Jeff had created something that a big player coveted.

Strategic Action – Jeff increased the desire in his buyer through smart plays.

E-myth – Jeff had created a business that didn’t depend on him.

And finally….

Patience – He was willing to wait for the right deal, up to and including walking, and that showed AMEX they were dealing with an equal, and they treated him as such.

Book Club #10: Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, by Ashlee Vance

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futureIt’s difficult to overstate the importance of Elon Musk in our current time. He’s a combination of Thomas Edison, Henry Ford, and Steve Jobs.

He already helped create a company that was the starting gun for what would lead to cryptocurrency (PayPal) and in his spare time he advises other companies that are taking on an idea of his that he simply has no time to pursue (Hyperloop).  

It’s important to read Ashlee Vance’s Elon Musk: Tesla, SuperX, and the Quest for a Fantastic Future not because you wish to imitate Musk, necessarily (though you certainly can), but because it’s fascinating to see the brain at the heart of so many changes going on in our modern world.

Vance spent years interviewing almost 300 people who were on hand to watch and work with Musk both personally and professionally. He also managed to get 40 hours with Musk himself to clarify and corroborate key and controversial points.  

Vance was driven by, among other things, how and why a man who has already amassed a fortune in one field (finance) would then turn around and risk it all on three fields he had no experience in (automobiles, space, and energy).  

Yet, there we see some immediate lessons. Musk has proven that you don’t need to know an industry top to bottom before barging your way in, and that sometimes money doesn’t cure all when chasing big ideas.

It’s a messy tale, whether it’s regarding his personal life (Musk has been through two wives, and has 5 children with the first, and is currently on to the third love interest) or his professional life (there were lawsuits around some Tesla departures and he fired a 12-year assistant essentially for asking for a pay raise).  

Vance makes it clear that Musk has the ability to do things differently, but has chosen to play to his strengths rather than work on his weaknesses.

A final thought…

Robert Downey Jr. met with Elon as part of his research to prepare to be Tony Stark of the Iron Man films. It’s because Musk might be the closest man to that fictional character we have – and for his flaws and superpowers – he’s not that far off from Tony Stark.

Check out Elon Musk: Tesla, SuperX, and the Quest for a Fantastic Future. It’s a fascinating read and a departure from the traditional business books you might have read up until now. 

Case Study #10: Why DIY is a Bad Strategy for Selling a Business

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DIY Bad StrategyAlexis Neely went into law to “save” her dad, who had started out wanting to be an entrepreneur, but ended up as a bit of a con artist.

She also hoped that being a lawyer would save her from all the ups and downs she saw her father subjected to.  

Alexis could never have guessed she would become an entrepreneur herself, but not before learning a big lesson of her own…

Don’t try to sell your own business, even if you’re a lawyer.

What lawyers aren’t taught

While Alexis did graduate first in her class from Georgetown law in 1999, and went on to work for the prestigious firm of Munger, Tolles, and Olson, she notes that lawyers are taught about the mechanics of very large corporations, not small businesses.

In addition, lawyers don’t often have entrepreneurial mindsets and are stuck in poverty mentalities.  

After four years of witnessing this firsthand (and being buried in paperwork instead of the meaningful legal work she hoped to be engaged in), she started her own firm in 2003. Within three years, Alexis was generating $1M/year in revenue.

So, then why sell?

Alexis had a vision for a different type of law firm that wasn’t constrained by a bricks and mortar model. She also had young children and wanted the freedom to work from home without having to go into the office frequently.

So, in 2007, she emailed a professional email list she had curated with a “contest.”  “Come work with me side-by-side and buy my practice.” She was deluged with offers and interest, but when she finally made a choice and got into due diligence, that person simply disappeared.

She had already mentally moved on from the business. She was doing TV and was working on a book. So she did what she thought was the next best thing, which was to find someone who had owned a practice for a long time.  

Alexis did manage to find a person who had owned his own law practice for 20 years, but what she didn’t know was that he had never been truly financially successful with it. And the reason she didn’t know was…

She didn’t know her numbers

This may be shocking to hear, but Alexis was using “bank account” accounting, meaning she would check the bank account to see if there was enough money in there, and if there was, that meant the business was doing fine, and if there wasn’t, she just went out and earned more money for the firm.

Great hustle chops. Dreadful business owner chops. She didn’t know what kind of reports she should be looking at or how frequently. She wasn’t paying herself a proper salary. And she wasn’t paying her quarterly or payroll taxes on time.

Rather than take the time to get the numbers right, she simply offered a sweet seller-financed deal to this lawyer who had owned his own practice. Even though the revenue was at over $100k/month, she wanted $500,000 in total for the business (she had no concept of a valuation and oddly, no one to advise her to get one) and was willing to take $50,000 down and the rest in an earnout.

It doesn’t work that way

Two short years later, Alexis got the gut-punch telephone call. The lawyer she had “sold” the business to told her that there was no money left and the deal was off. She then went $150,000 into debt to service the remaining clients and wind that company down.  

While Alexis opined that you can’t take someone who’s never played at the level of a million dollar business and drop him/her into one and expect success, she placed the blame on herself. Doing everything herself cost her at least $1M.

Biggest Takeways

Years later Alexis notes that she always has financial statements that make 100% sense, that she reviews them weekly, monthly and quarterly, and that she would never again sell a business without using a broker.  We could have told her that!