The simplest and most effective way to upsell customers is by establishing a relationship. When people make decisions, they usually do so after consulting friends and family. There are numerous psychological and evolutionary reasons that I don’t have the time to get into with this post, but let’s look at a few anecdotal examples. When people choose a college to apply to, it’s usually done with the input of family, intimate friends and a guidance counselor. When a woman at a bar is approached by a man, within a few minutes she’ll instinctively signal for her friend’s approval with her body language. If her friends don’t approve, they’ll give “the raised eyebrow look” or simply turn their back to the man and give him negative body language. Our need to ask for approval and consultation when making choices is done both consciously and subconsciously. The decisions we make are naturally biased to include the opinions of our peer group.

So if you really want to grow your business, if you want word-of-mouth buzz, increased conversions and customer loyalty, you need to work on developing more than just a customer/client relationship. To do so entails changing the way we think about our clients.

To change our relationship with our clients, we have to stop thinking about them as potential leads. Instead, we should think about how we can best benefit them without the need to get paid back. If the focus is on getting fair compensation for value that we give, then inherently the value of the transaction is degraded. If instead the focus is on giving as much to our clients as we can, they’ll then in turn value the relationship with us that much more.

They’re are numerous ways to give value to our clients, but the best way to do so is for FREE. What? Don’t people devalue things that are free? Not necessarily. If what we give away is of little value, for example a corporate sponsored water bottle at a marathon, then we associate little to no value with the transaction or the other party. If however, we give something meaningful, something above and beyond what people normally associate with “free”, then we’ll get a whole lot of customer loyalty. People will talk about how they got a “great deal” or know “this guy” that gives them special treatment.

Have you ever read Alice Schroeder’s “The Snowball: Warren Buffett and the Business of Life?” It’s a fantastic biography and I highly recommend it. There’s one passage in the book that I found quite salient to this topic. Every year, the little known investment bank (at least for non-financial people) Allen & Co. hosts a media conference at Sun Valley. The most highly regarded media and tech CEO’s, the Steve Jobs, Bill Gates, and Warren Buffetts of the world always attend. They might shun media conferences from bigger and more well known investment banks like J.P Morgan, but they almost always go to Allen & Co. The two main reasons they go is because a.) everybody who’s a bigwig goes and b.) the deeply personal relationship that Herb Allen’s, the CEO of Allen & Co., has built with them.

How can one guy build a relationship with the top industry leaders, including diehart competitors, across numerous sectors? Free surf n turf, babysitters and exclusive schwag like Allen & Co. Golf Polos. Most of that stuff costs Allen & Co. pennys. But the effect is powerful. The kids of the CEO’s always want to come back every year. And Warren Buffett, one of the richest men on earth, admitted that he relishes putting on the Allen & Co. polos.

So make a list of what you can give to your customers right now, that would cost them nothing to receive. Make it big. A couple of helpful hints on your blog, or a free newsletter is just the tip of the iceberg. Do you have a book, a video or some other form of content that you can give away for free? How about a sample version of something you’re selling? If your business is offline, make sure to include hand written thank you note. Sooner or later, you’ll repeat the rewards. It may not be in the form of direct income. It may be through word or mouth or new relationships which are often more valuable than money.

On one recent trip to Szechuan, I decided to spend a day at the zoo. In Chinese zoos, you can rent tour guides for a few hundred yen a person ($30-$40). After meeting our guides, we were loaded into freshly painted green jeeps not unlike the ones used in the Jurassic Park movies. They were designed to withhold force from any animals that might have gotten loose. We started off on a standard tour about the zoo’s ecological system including it’s massive forest. As we kept driving, the thick trees of the dense forest gave way to a clearing full of giraffes and rhinoceroses. Slowly, I felt like I was on a safari deep in the heart of Africa.

We’ve all seen discovery channel blurbs about giraffes, but there’s nothing like experiencing the power and elegance of these creatures up close. Their long, slimy purple tongues would give Gene Simmons a run for his money. I was given some vegetation to feed the giraffes. Up close, I could touch their cheeks and look into their almond eyes. It was surreal the way they they moved their necks. One moment their heads would be inches from my hand, and in the next moment their faces would be sweeping the sky in one graceful motion.

The highlight of the trip was the feeding of the lions. Remember that scene in Jurassic park where they load a lamb into the velociraptor pen? The humans watch from the safety of their vehicles as the little sacrificial lamb stands motionless. In one shot, we notice the bushes rustle and the look of terror on the lamb’s face. In the next shot, there is nothing there except a few dismembered limbs.

I was a given a live chicken when we approached the lion pens. The zookeepers told me to get out of the car and chuck the chicken over the roadblock. At first I hesitated, I think a PETA ad ran through my brain. But then I realized I eat chicken every week, and this was just the circle of life. The chicken was on the other side of the road.

I hustled back into the car and waited. The chicken just stood there, unaware of what was about to happen. One of the female lions silently strode out of the bushes and onto the middle of the road. The chicken started clucking as it realized a natural predator had arrived on the scene. It tried to fly but only got a few inches of the ground. The lion stared at the bird in amusement. I think I saw her lick her lips. In one pounce, she sundered the bird in two. Guts and entrails hung from a claw while the lion filled her jaws with the sweet meat of the bird. In only a few seconds, there was nothing left but a few pieces blood stained feathers.

Other animal interactions included holding a tiger’s tail ever so gently while praying to god. For the faint of heart, you can get your picture taken with a panda on your lap. For fifty bucks, definitely a worthwhile deal.

Steve Forbes Interviews Liz Ann Sonders, Charles Schwab chief investment strategist

(Click above to open video in new window)

My Notes on the Interview:

2:20 – Establishes her investing philosophy of long time guidance over market timing
3:15 – Explains emotion and time as two components of risk
4:40 – Over time proper asset allocation drives 90% of returns (selling into strength and buying into weakness). It’s also automatic
8:00 – Pockets of recovery throughout the economy
9:45 – Bloomberg financial conditions index as a snapshot for the credit market
12:00 – Fed has a tough balancing job between stimulating economy and limiting inflation. Sonders gives them a good mark
18:30 – Greatest financial lesson: Finance needs to be more accessible (Hope I’m helping!)
19:50 – Not bad a time to go to graduate school, then come back out during boom
20:50 – Agreed, most models are BS. A lot of models are really complicated but depend strongly on a few variables, which can be tweeked by bankers. There’s also  the real life problem of “garbage in garbage out” meaning if what you use as inputs isn’t accurate, you’re output will be significantly off.

Steve Forbes Interviews John Catsimatidis, Entrepreneur & Commercial Real Estate Developer

(Click above to open video in New Window)

My Notes on the Interview:

2:20 – Own every piece of your business, including the real estate
5:50 – I hope nobody in who works in finance was dumb enough to buy their homes with company stock as collateral
7:30 – Americans like buying American? Well that depends on the product. On most stuff Americans don’t care. On politically sensitive issues, I agree
9:00 – What happened to oil when it jumped to $140 or why people hate Wall Street
11:40 – Principles of starting a business
13:00 – Salesmanship 101
14:30 – Doing his best Clinton impersonation

Steve Forbes Interviews P. Brett Hammond, TIAA-CREF chief investment strategist

(Click above to open video in New Window)

My Notes on the Interview:

Preinterview – A Republican complains about a Democrat. Shocking.
3:08 – Reframing 401(k)s, annuities (income) vs. nest eggs
5:05 – Differentiate the goals of your money
6:05 – Variable annuities explained (riskier than fixed annuities, but chance for higher payouts)
8:00 – Streamlining 401(k)s (autoenroll, assett allocation, annuities)
9:30 – Average contribution rates of 6-8% is not enough. Aim for 17%. (Increase your auto contribution)
10:30 – Why you should default into a lifecycle fund
11:30 – The paradox of choice affecting 401(k)s
12:20 – Inertia. Or people are lazy
14:30 – Pick the best company in a sector rather than sector. I disagree. I don’t think anybody should be picking their own stocks. Knowing just enough to be dangerous is worse than knowing nothing
16:20 – Look at Management. Buffett & Peter Lynch mentions investing in companies that are so good, that an incompetent executive won’t mess it up, as eventually somebody incompetent will be in charge
21:00 – Macroeconmic Viewpoints. Feel free to skip this
25:20 – “Bold Prediction: Euro as new standard.” Feel free to skip this

Thoughts:

Although inertia plays a role in why people aren’t more proactive when it comes to 401(k)s, behavioral economists have long proven that people feel the pain from losses much stronger than the joy of gains. So when the average small investor thinks about investing, he focuses more on what he might lose rather than on what he might gain. This is why left to their own devices, people tend to buy high and sell low.

This is also why people tend to adopt their company’s default option when it comes to selecting a 401(k) plan. Just making an option the default makes people think of it as superior to the other choices.

Extra Reading:

Loss Aversion and Status Quo Label Bias

Before you start spending money to buy YOURBILLIONDOLLARIDEA.com, you should read over this checklist to ensure that you’re positioning yourself with the greatest chance of success.

1. Handle Your Personal Finances

If you spend more than you make, carry credit debt, and don’t save, then you shouldn’t start a business. Huh? Wouldn’t a business generate enough money to help me pay off my debts? The truth is, you will most likely adapt your personal habits to your business. You won’t be able to manage the cash flow of your business and will only end up exacerbating your financial problems. There’s a reason Warren Buffett’s license plate says “Frugal.”

Let’s do a quick exercise. Imagine yourself as a stock analyst and your personal finances as the financial statements of a publicly traded company. You’re analyzing various companies to determine whether or not they’d be good investment. During your analysis, you find that the company in question can’t generate enough income  or cut enough costs to be profitable and cash flow positive. In all likelihood, you’d recommend a sell rating. If that same company decided to start up a subsidiary, and you were going to analyze the prospects of the subsidiary company, an honest analysis would have to be skeptical at best given your previous analysis of management.

In short, developing a habit of paying off your credit cards in full every month is the first step to having a financial life. You will be guaranteeing yourself an immediate return of 11% – 24% in credit card interest rate fees. This is a higher rate of return than what you’d be able to make in the stock market or through the first months of a new business. And unlike investments, it’s guaranteed.

Although it can cause narcolepsy, I talk a lot about personal finance because it’s so essential to a successful business. If you want to be rich, and you don’t have a jump shot, then this is the one area of your life that needs to get handled immediately. I have numerous articles on personal finance, as well as links to books and blogs that I’ve found to be useful on my resources page.

2. Be Properly Capitalized

The majority of small businesses fail in their first year. Why is that? The simple answer is because they just don’t start with enough capital and as a result, run into cash flow problems. It won’t matter that you have the best idea in the world if you’re suppliers refuse to ship you inventory. If you want to learn more about why being undercapitalized is such a prevalent cause of failure, I recommend reading The E-Myth Revisited by Michael Gerber.

I put italics on the word “properly” because capitalization is just as much about quality as it is about quantity. You have to be capitalized from the right sources. If you have $10,000 in savings, and your business fails, you’ll have lost $10,000. But if you put $10,000 worth of charges on your credit card and you can’t pay that off within 30 days, except to be losing a lot more than $10,000 when you factor in the 11% – 24% interest rate and the hit to your credit score.

3. Make Sure You Have the Time

While startups have a variety of capital requirements, all startups require a lot of time. If you’re working 15 hours a day at an investment bank, you probably don’t have the mental energy to go home and do more work. If you do, then you’re either lying to yourself or you’re from Mars.

For the 9 – 5 crowd, you can definitely squeeze more hours into the day by changing your habits. This might mean using TiVo, waking up earlier, or batching chores like cooking into one day. (Body builders do that a lot as they try to eat 6 times a day. Imagine cooking 6 times a day! The dishes would kill me.)

4. Make Your Business Scalable

This is one of the main reason I prefer operating e-commerce product sites. If I ran a restaurant, and I wanted to seat more patrons, then there would be a lot of fixed costs to incur. It would take several months expand the floor space. Additionally, I’d have to hire more employees. Eventually, the most successful restaurants won’t be able to get any bigger without a lot of headache.

Even a lot of internet businesses don’t have the potential to be scalable. This is why selling on eBay, tutoring kids, or posting your services on craiglist are not viable in the long term. If you need immediate income, you should definitely look into any of those avenues. However, in the long term you’ll eventually run out of stuff to sell on eBay, run out of time to tutor and if you’re selling a service, have to hire more employees who could potentially take your clients with them.

On the other hand, a product based business is only confined to the size of the market. A startup can go from a hundred buyers to a million buyers very quickly if the market can support the growth rate.

5. Start with a Market, Not a Product

Speaking of markets, this is a simple, but often ignored rule. It seems intuitive, but if it were, nobody would make this common mistake. I first encountered this idea in Tim Ferris’ New York Times best-selling book, The Four Hour Work Week.

Basically, what I mean is that if you’ve developed a great product, for example a bike with three wheels to provide more stability, the product won’t necessarily sell if there’s no market. It’s a lot harder creating a new market than it is to create a product to fill the needs of an existing market. Instead, do your research to see if a market exists, and exactly how saturated it is, before trying to design a product.

You can use Google’s Keyword Tool to quickly estimate the size of a market by the quantity of search terms within that market.

6. Make Sure Your Idea Contains Offense and Is Defensible

By offense, I mean most entrepreneurs without relationships to angel investors and venture capitalists need immediate cash flow. The faster we can be profitable the better, so that we don’t keep eating into our startup capital. Again, most small businesses won’t be graced by angel investors or venture capitalists. The way venture capitalists work is that they try to get a 10x return on their investment in only a few years. Most of the time it won’t happen, but they will only invest in businesses where the potential is there. If you’re business doesn’t have the potential to scale, you will be ignored. Therefore, we need be self-sustainable as fast as possible.

When Warren Buffett invests in companies, he talks about the idea of having a “moat around the castle.” Ideally, you want to create something that can’t be immediately ripped off by imitators while retaining enduring competitive advantages. How do you do this on the internet, when everybody ysteals from everybody else?

The simplest way is to create a brand through compelling content and a superior customer user experience. You’ll build trust. Think about amazon. I could start my own online book company tomorrow but nobody would go to it as long as Amazon exists. A great way to start a brand for yourself is through a blog or an e-book.

7. Perfection is Unattainable, So Don’t Try

Your time is very valuable, and the perfectionist in you will try to waste it the smallest of details. I hated this personality trait in investment bankers and I continue to hate this personality trait in entrepreneurs. For entrepreneurs, I think that it’s a tactic we use to paralyze ourselves into inaction. This way, we put off the thing that we hate doing, even if it needs to be done, until tomorrow.

In most cases, having a solution that does 80 – 90% of what you want is good enough. By definition nothing can be perfect. I can’t tell you how many hours I’ve wasted trying to make one aspect of something perfect, only to realize that what I had before worked just fine, and in some cases better. Seeking perfection will only generate diminishing returns on your time.

8. Give Yourself Room for Error

Once you realize that nothing you do will ever be perfect, you’ll soon realize that everything you do will be imperfect. Trying to mitigate every little error can be just tedious as trying to create perfection on earth. Instead, give yourself room to screw up.

For example, let’s say that your product sells for $30, and that you thought it would cost $15 to acquire a customer via pay per cost advertising. It costs you $5 to manufacture and ship the product. In this simple scenario, you’d make $10 per sale minus a small amount of fixed costs.

But maybe you underestimated the cost of PPC advertising in your niche while overestimating your own click through ratio. After testing, you realize the cost of actually acquiring a customer is $27. This would be a recipe for disaster in a lot of e-commerce sites.

If however, you were both able and willing to mark up your product 10 times to $50, instead of 6 times to $30, then you could still use PPC marketing as a viable form of advertising.

On the other side of the coin, restaurants are notorious for having a slim profit margin. Out of every dollar a customer spends, only 4 cents becomes profit. The rest is eaten up by costs. There are numerous reasons to start a restaurant, such as immediate social value. But I would never start a restaurant to try to make money.

9. Prepare for an Emotional Rollercoaster

You’ll probably be very enthusiastic the first month you start your business. Then you’re energy will inevitably wane as you deal with the day to day tasks. Doubt will creep into your head. Pretty soon, you’ll feel slighted when friends good naturedly ask “how are things?” If you’ve hit a particularly rough patch, you might be tempted to punch your loved ones in the face when they look at you funny.

A day later you’ll have a huge sale, hear from a VC and feel like you’re life’s been saved. Hurrah! The VC will call back the next week and say that he dialed the wrong number. Ugh. But he still loves your idea. Hurrah! Just not enough to invest…

10. Set goals, Follow Them

If you’re not a goal oriented person, you’re going to have to be one. Being your own boss is difficult in many ways, least of which is motivating yourself to do work when you’d rather watch Hulu.

I saw a great Nike ad the other day, it simply had the words “Yesterday you said tomorrow.” This is what happens without goals. Set short, medium, and long term goals. Before I go to bed every night, I make a checklist of what I have to do the next day, in order of importance, so I don’t waste time meandering by on Facebook, Gmail and News sites when I should be doing work.

I also create weekly, monthly, and yearly goes. How do you know when you’re succeeding without goals? More importantly, how do you know when you’re failing?

The easiest way to create goals is to use technology. The founders of Google admit to using Google Calendar instead of secretaries. I use Mint.com to set my personal finance goals and Google Calendar to set my business goals.

Extra Credit:
Make sure your business idea is not one of the following: Funny T-shirt Website (inventory and design issues), a premium version of a free service (hard convincing people to pay), already been done (social networking), no chance for monetization (you need cash flow)

“Don’t wear it now,” she simply said.
“What? Why?” I whined.
“You’ll get it dirty. Save it for later,” she responded.
“Um, when?”
“Maybe when you go back to America.”

At the time, it made no sense to me why I should “save wearing a T-shirt.” Aren’t new clothes meant to be worn?

When I was six, my grandmother was escorting me to America for the first time. I had not seen my parents since I was two and had never left China. On the Delta flight over, my grandmother saved portions of every meal that we were served, even the bones from my chicken wings which still had a few pieces of flesh. There were also times when I was still feeling hungry after finishing a meal. Instead of asking the flight attendant for more food, she’d say “no you’re not” and take away my Jello! But then when I wokeup from a nap, she’d conjure food from nowhere.

“I saved my meal from earlier because I knew you’d be hungry later,” she said.

That same evening, during a layover, my grandmother realized that we were missing one of the chicken dinner she had saved. I tried to reassure her that it was no big deal. But the look of pain on her face was as if she had been told a loved one was a dying. It was unbearable. She was angry with herself for being slightly careless.

That day, I learned two important lessons. The first was of the uselessness of delayed gratification. The second, and more important lesson, was about being honest with myself.

Everybody loves to place blame. We blame society, wall street, the media, the government and each other for our collective inability to save. But looking at what’s wrong with the world is the wrong approach to personal finance. Now there’s nothing wrong with taking an interest in the economy. And in this global environment, it may very well be a necessity to educate oneself on macroeconomics.

But when people focus most of their mental energy on things they can’t control, they are inherently paralyzing themselves. Because what else is paralysis?

Instead of developing habits based around saving or investing, people focus on the things that they can’t fix. So they do nothing but lie to themselves. This is why when people buy something they can’t afford, they might feel anxious, but then quickly reassure themselves that “they’ve been good and deserve it” or that “it’s on sale so it’s a deal.”

To face ourselves, that’s the hardest thing to do. To learn how to do it at an early age, that’s God’s gift to make the act of self-examination bearable.

“That is the way we are made; we don’t reason, where we feel; we just feel.” – Mark Twain

Increasing conversion is one of the most mythical aspects of Internet marketing. Most entrepreneurs subconsciously have a vague notion about the idea of conversion. They say to themselves, “If I add ‘testimonials’ to my webpage, I think more visitors will actually buy my product.” Ah ha, that’s the secret sauce! They then go about writing customer copy. In a few weeks, they might have more a few more sales. But is that due to the new testimonials? What if the testimonials were placed before the checkout button rather than at the top of the page, would that increase conversion? Do I have to create A/B multivariate tests before I can actually record any results?

Isn’t there a simple solution, like one quick fix I can implement so my conversion rate goes from 1% to 2%?

Yes, but first you must WHY people are buying from you in the first place.

Here’s a formula I’ve created from my experience and through reading about other Internet marketers.

Conversion Rate = Perceived Value Of Offer – Anxiety & Friction

The perceived value of your offer or product is composed of numerous factors, and price is only one of them. For example, are your trying to solve a huge problem this person has or are you selling a subscription to Netflix? If I was going bald and you had a product that MATCHED my desire to stop going bald, that’s a lot more valuable to me than a discounted Netflix subscription.

The Perceived Value of an Offer

The perceived value of your offer is also determined by any incentives you might have. I had a promotion where long term customers would get 10% off their order. I then extended this “limited time” promotion to first time customers if they used a coupon code. By doing so, people thought they were “getting a deal.” The increase in sales more than compensated for the 10% loss in my gross margin. This is the reasons retail stores have “sales” every 5 days. It creates the perception of additional value.

Price is also factor, but not in the way you think it is. In a perfect market, conversion will go down if the price for an offer goes up. However people are not perfect animals. Let’s take an extreme example to illustrate my point. If you were going to have laser eye correction surgery, and the market price was $2,000, but one doctor was charging $300 would you want him to do the procedure? Doesn’t a red flag instantly go off? Don’t you feel more anxiety about the $3,00 doctor? After all, you may go blind, and for most people, vision is > $1,700 in savings.

There are many most instances where the customer WANTS TO PAY MORE. If you charge them less, conversion will go down. Most of the time, people don’t value something that’s free or cheap. Have you tested your offer to see if you can make more money BY RAISING PRICES? Now that’s leaving money on the table.

And most importantly, if you can CLEARLY COMMUNICATE your value, (clarity trumps persuasion in sales), then you can significantly increase your conversion rate.

Anxiety & Friction – Why Sales get Abandoned Like Redheads

I learned a quick lesson my first day as a salesman at Sears. I was selling vacuums and closing in on a deal. Now Sears doesn’t make much in the sales of a product, but they make a ton of money through “Extended Service Warranties.” Salesmen at Sears were evaluated not only on their revenue, but how many of these extended warranties they could sell.

As I was ringing up a customer, I went into my pitch about why he should buy a $30 warranty for a $300 vacuum. He stopped me midway through my reheard lines and proceeded to grill me on the manufacturer’s warranty. When I told him about the inadequacies of the standard warranty, that it was for only 30 days and that he’d have to bring it state lines to get it fixed, he turned around and walked away without hesitation, taking my commission with him. I had made the sin of creating too much anxiety without relieving it immediately. Suddenly he was overwhelmed with the notion that he was not getting the perceived deal he wanted.

In Internet Marketing, most sites have huge problems with both Anxiety and Friction. Unless you’re Amazon.com, most customers will be VERY weary about giving you their information. Identity theft is currently a $[xx] billion dollar problem. If you’re not a well-known brand, expect to lose numerous sales on the screen where people have to pull out their credit cards.

A very EASY solution to decreasing anxiety is to have the “We are Hackerproof, SSL Secured, VISA secured, MacAfee Secured, Nuclear Fallout Secured” logos right next to the submit credit card button. Placement is important. You want to alleviate anxiety the moment it occurs, not before and not after.

Friction on the other hand, has to do with the flow of your webpage and is harder to solve because it requires extensive testing. Every website I’ve seen has numerous problems.

For example, is your checkout page one daunting long form or is it split into 3 pages so that customers feel like are making progress? Do customers have to register a new account or can they make the sale as a “guest?” Is your page easy to navigate or is it too cluttered? Does your offer suffer from the “paradox of choice,” leading to confusion and inactivity by the customer? Are there opportunities for the user to click out of your website via irrelevant links to other pages during the sales process? Have you even asked yourself any of these questions?

If not, then start doing so. More than [xx]% of all sales are abandoned in the cart, meaning customers are ready to buy but hit “X” or the dreaded back button on their browser.

After reading all of this you should realize that there is a lot more to jacking up conversions that “just one thing.” But implementing most of my suggestions should take you 45 minutes and lead to massively increased conversions.

If you’re starting a new business, you’ll be faced with four choices for incorporation. The value of incorporation is extremely high while the cost is relatively low. If you’re trying to get a merchant account to do your own payment processing, being incorporated is a must. The four main types of incorporations are as follows:

• Sole Proprietorship
• C Corp
• S Corp
• Limited Liability Company (LLC)

You will almost never want to start a sole proprietorship because it provides no liability protection. If your company gets sued or falls into debt you’re responsible. End of story. On the other hand, you are not a multi-billion dollar corporation so you do not need to deal with the expenses of a C Corp.

So we really only have two choices for most entrepreneurs, S Corps and LLCs. This is where things get interesting. Here’s a table I created showing their relative Pros and Cons and why I think most businesses should probably incorporate as LLCs.

Those are the major differences. In my view, you don’t want to be wasting your time with having to elect a board of directors, dealing with minutes and all the other hassle that comes with S corps. Just start an LLC as it’s easier to run while providing the advantages of being a separate legal entity.

Where to Incorporate

90% of people should get incorporated in Delaware regardless of the physical location of their business. If it’s good enough got 55% of the Fortune 500 companies, it’s good enough for you. There are numerous reasons to get incorporated in Delaware. There’s a much faster turnaround time with paperwork than most states. The fees for incorporation are also cheaper. Finally, Delaware has a court system that is pro-business.

Keep in mind that even if you incorporate in Delaware, there’s still laws you may have to follow in your own state. For example, California has a code called “long arm statute” which basically tells says that you still have to abide by their laws regardless of where you incorporated

How To Get Incorporated

Using a third party incorporation company is by far the easiest and cheapest way to get incorporated. These companies are called “Registered Agents.” There are numerous companies you can find on the Delaware Division of Corporations website. Instead of inundating yourself with 100 choices and doing nothing, I’ll just share the company I use.

They’re called Incorporators USA, LLC (an LLC, imagine that) and for a few hundred bucks, they did all the heavy lifting for me.  They took care of my EIN, IRS tax stuff, certificate of incorporation, and act as my registered agent.

If you’re still confused about the process, checkout the IRS website. Just don’t get lost down a dark hole and end up doing nothing. Get it done and move on.

“Wall street people learn nothing and forget everything.” – Benjamin Graham

Let’s pretend that you’re the owner and general manager of a major league baseball team. Here’s the rules. If you’re in your twenties, then you have 40 to 50 years to run the team and try to win a world championship. A world championship is defined as saving and investing enough so that you can retire happily without worrying about your money running out. If you’re not in your twenties, then subtract your age from 65 and that’s how many years you have to win.

As a general manager, you have two to ways to fill out your roster.

1. Pick all the best players yourself.
2. Higher a VP of Scouting who does the work for you. There’s two very different types of VPs on the market.
   • Jim Kramer: A high powered baseball guru. Although he’s very expensive, he comes highly recommended and promises results. If not he’ll throw chairs around.
   • The Baseball Tron 5000: A simple computer program.  The Baseball Tron 5000 doesn’t take into consideration a particular player’s strengths or weaknesses. Instead, it issues a contract with every player available and pays them all a small retainer to be on your team. However, because your team will be so large most of them can only play a few games for you. In that sense no single player will have a huge impact on your overall performance. The program is very inexpensive compared to Jim Kramer.

Let’s say you picked the “Do It Yourself” approach. I’m going to be honest with you, this is a dumb choice. First of all, you don’t know anything about baseball. You don’t know what an ERA or what an RBI means. When you make a trade for another player, you’re probably going to get screwed by more knowledgeable managers. All you know about baseball is that after watching a few games, it’s exciting to see somebody step up to the plate and crack a homerun.

So you know you need a homerun hitter. But he needs to last 40 years.  Ideally, you’d like him to hit 60 home runs every year but you know that would be impossible. In some seasons he might be so bad that you want to fire him. If he does, you’ll have lost a huge amount of your capital. That’s a lot of risk to take on a single player.

“What the hell,” you say to yourself. You’re young and you have to be aggressive. You subscribe to Baseball America, which has identified 10 players who did really well last year. You decide to make a substantial investment, 20% of your capital in a couple of these hotshots. It’s risky, but they come highly recommended! The next year, your guys start off good but fall into a slump. Now you have a problem. You’re debating whether or not if you should trade them and take the loss or wait and hope they improve. As you’re debating this, a new copy of Baseball America arrives. It’s touting 10 completely new “Must Own” players. They’re gonna kill it!

In investing, picking a single stock or even a couple of stocks that you think will kill it is like trying to identify a top slugger. There are many great players who do better than expected, but do you really trust YOUR ability to pick the best players when most professionals GM’s can’t do it? You might get lucky and find a Cal Ripken who returns above average results for a long time. But for every unidentified consistent winner, there’s a Sammy Sosa, an overpriced stock everybody loves in the short term. In the long run, these stocks probably won’t be giving you above average returns every year. They’ll return to the mean unless their really special. But even if they are special, you won’t know when they’ll slump or when they’re about to take off, so any investment that depends on when you buy/sell rather than buy/hold will depend on a healthy does of luck.

After learning more about baseball, you realize that it’s a bad idea to concentrate your capital into only a few players. Instead, you realize you need infielders, outfielders, and pitchers. Most people never learn the lesson you just learned. They try to find as much offensive one hit wonders as possible and forget about defense. They load they’re portolio with 5-10 stocks and think they’re “diversified.”

You carefully avoid that trap by filling out 10% of your roster with pitchers who do well when hitters struggle. For a small price, bonds will offset your risk to equities. This is the basic meaning of “hedging,” before hedge funds made the word a catchall for exotic investing.

You can also diversify your offensive. You not only buy U.S players, but also players from China, Costa Rica, Japan and Europe. In investing, this means having pieces of small, medium, and large companies which are both domestic and international. The key takeaway is that after you are diversified, if one sector goes down, it doesn’t drag your entire portfolio with it.

Let’s forget about picking our own players and go back to the second option. You hire a VP of Scouting. The way the VP of scouting does his job is by buying you small shares of every single player available so that you can create a farm system. No single player will have a great impact on your team, but if they all do well, you win. Statistically speaking players get better with time. You can get all these players through a Jim Kramer, who actively manages finding new players, or through the Baseball Tron 5000.

Out of your two VP’s who does a better after 40 years? Is it Jim Kramer, the bald but brilliant, chair throwing, temper tantrum guru? Or is it the silent and emotionless Baseball Tron 5000?

As it turns out, the Baseball Tron 5000 is the winner. That shouldn’t really surprise you if you’ve learned your lesson from trying to pick your own players. The Jim Kramers of the world, the actively managed mutual funds, have numerous fees and expenses that will cut into your profits. Because of these fees, almost all of them fail to beat the market. It would require somebody with an extraordinary amount of skill and information to succeed. Secondly, even though a few of these guys exist, (e.x. Peter Lynch, Warren Buffett) LIKE STOCKS, YOU WILL NOT BE ABLE TO IDENTIFY TOP MANAGERS UNTIL AFTER THEY HAVE SUCCEEDED.

On the other hand, the Baseball Tron 5000 is both cheap and effective. What it lacks in marketing it makes up for in performance. Since we know that as a whole, stocks do better over time than other investments, we know we need to be in the market. But we want to reduce our exposure to egregious fees and unnecessary risks. The best way to do this is by buying the entire market. Passively managed index funds do this for a very cheap price.

Vanguard and Fidelity are two of the most trusted name in the industry as far as passively managed no load funds go. Vanguard’s fees are usually around 0.19%. Fidelity’s Spartan Funds, are even cheaper with a 0.10% fee. They have no other fees or restrictions. Compare these prices to an actively managed fund’s fees of 2.0%. Over time and through the power of compound interest, that’s a HUGE difference. It could mean that you lose nearly 50% of your gains over time if you pick an active fund over a passive fund.

If you want something that you basically “set and forget,” take the time to look into a lifecycle fund. These funds work the same way as an index fund, except that they change their mix of stocks and bonds on their own as you age. If you want diversification and proper asset allocation (which you do!), these funds do it by themselves, although they aren’t perfect.

For example, be wary of the overpriced lifecycle funds that have fees around 0.70% which will cost you quite a bit of money in the long run. Also, make sure that whatever fund you do buy doesn’t concentrate all in one type of sector. There’s so many exotic sector index funds that it basically beats the purpose of indexing if you buy into them. Like any investment, these funds are not guaranteed. They just have less risk and upkeep compared to other ways to investing in the market.

Before you go dumping your 401(k) into one of these funds, make sure that the retirement date matches up to your age. If you’re fifty-five DO NOT buy into a target retirement fund set for 2050. You don’t want to see your entire savings reduced by 40% in one year if you’re just about to retire.

Also, don’t just plunk all your money down at once. That’s like spending all your capital to lock down contracts for every player in one season. It would be much smarter to have capital on hand so that you can renegotiate contracts the next season when prices change. In investing, you do this via dollar cost averaging to deal with the tyranny of the market.

Checkout the 22 year chart below for why you should dollar cost average into the market. It also shows the results between two of the more popular and “successful” actively managed mutual funds versus the Vanguard total market 500.

Here’s the main takeaway from this chart. You’re just gambling if you try to time the market rather than dollar cost average. The past won’t predict the future so the best way to invest is to do it a little bit at a time, over a long period of time.

Extra Credit Reading:

Bloomberg Story: Magellan Shows Peril of Active-Managed Stock Funds as Fees Bite

Wikipedia: John Bogle

A Random Walk Down Wall Street