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July 12, 2018

Bigger Better Faster Stronger

Last week we talked about wanting to make money. Let’s say you have the desire. How do you go about doing it?

As we said before, some jobs pay more than others. Being a dentist pays more than being a teacher, but being CEO of Facebook pays more than being a dentist.

Ever wonder why some jobs pay more than others? I mean, it’s really hard to be a teacher, yet it doesn’t pay very much. But if jobs paid on the basis of how much they suck, then sea urchin divers off the coast of Southern California would probably be the highest-paid people in the world. So that’s not it.

Some jobs are easy, like being an actuary. Sit in an air-conditioned office, run some models, maybe navigate some office politics, make multiple six figures. No risk, no responsibility. Only thing is, you have to pass ten ridiculously hard math exams, and not everyone can do it. Very few people can be actuaries.

Now we are getting close to the answer—pay is a function of supply and demand. There is a huge supply of teachers, and only a tiny supply of actuaries. If there were more of them, it would drive wages down.

Lots of people think it is grossly unfair how little teachers are paid. Hey, supply and demand, bro. I have heard of some universities actually experimenting with paying adjunct professors nothing. And they can do it, because there are a lot of adjunct professors, and some of them are willing to teach for zero dollars.

On the other end of the spectrum, you have Jeff Bezos and Mark Zuckerberg, two of the richest people in the world. How did they get so rich?

They have something in common.

Scalability

Since this newsletter is supposed to be funny, let’s say you are a high-end prostitute (hopefully you find that funny). You make $4,500 per appointment. If you have a few client visits a day, and work 252 days a year, you can do some quick mental mathematics and come up with a rough estimate of what you would make in a year.

You would be pretty rich! You might be filled with regret, but you would be rich.

But not as rich as Mark Zuckerberg.

In fact, no prostitute, or dentist, or taxi driver will ever be as rich as Mark Zuckerberg. Maybe they are smarter than Mark Zuckerberg. Maybe they work harder than Mark Zuckerberg. Makes no difference.

Their job is not scalable.

I first learned about this concept years ago from Nassim Taleb. Scalability is the idea that you can do 100 tasks as easily as 1 task. Like financial newsletters, for instance. The internet allows me to write one newsletter and make hundreds of thousands of copies with zero additional effort and send them out.

Pre-internet, there were some guys that sent out faxes, but boy, was that a pain in the ass. Pre-fax, the newsletter business went through the mail, and you had to stuff envelopes. That’s slightly scalable (more scalable than prostitution), but not very scalable.

The internet allows a lot of things to be amazingly scalable.

It’s not like people weren’t getting rich before the internet, but they are really getting rich now. Think about Facebook, for instance, which Zuckerberg famously constructed in his dorm. It is an infinitely scalable computer program.  It works the same with one user as it does with two billion users.

Sure, there are physical constraints—if you want to save all that stuff, you need lots and lots of servers. And there are still other constraints—you need to hire people to take down comments and look for dirty Russians placing ads. But aside from that, it is infinitely scalable, and there’s no reason why every person in the world couldn’t have a Facebook account. Almost a third of them already do.

Now that’s powerful.

Amazon is also infinitely scalable. A brick-and-mortar store is not. Say you are Hot Topic—you have to go from mall to mall to find locations to put your stores. You need to figure out logistics to get your products from distribution centers to stores.

Amazon doesn’t need stores. There are some physical constraints: it needs distribution centers, but little else. It is way more scalable than traditional retail. This is why Jeff Bezos is worth what he’s worth and the Hot Topic guy is worth what he’s worth.

I’m not saying you should aspire to be Jeff Bezos or Mark Zuckerberg—I bring them up only to get you thinking about scalability, and how to make your business more scalable.

How to Make a Business More Scalable

On the surface, being a dentist is the least scalable profession imaginable. There are just a limited number of patients you can see, given the size of your office and the number of operatories. But some people are trying to make it scalable. Private equity shops and big corporate dental companies are rolling up smaller dental offices to achieve economies of scale. If you are a dentist and have some cash laying around, it might not be a bad idea to think about rolling up a few practices yourself.

Restaurants are also not a terribly scalable business—but some people manage to do it. There is a restaurant group here in Myrtle Beach that has about 15 restaurants under its umbrella. They are fairly successful.

If you haven’t seen The Founder, about the growth of McDonald’s, I highly suggest you check it out. The McDonald brothers were playing Dr. No, and resisted all of Ray Kroc’s efforts to scale the business.

The McDonald brothers viewed themselves simply as a single hamburger stand. But if you have a good thing going, it behooves you to take that idea as far as possible, rather than simply sitting on it.

If you are a real estate agent, open up an office. Or several offices.

Etc.

Think about what Silicon Valley does. It took a very linear business, like driving taxis, put it on the Internet, and scaled it. It is taking electric scooters, and is putting them on the internet, and scaling it. It scaled restaurant reviews, travel booking, dog walking, residential real estate valuation, and is now trying to scale filling prescriptions.

If You Can’t Scale

You are a high school teacher, and you aren’t able to scale. What do you do?

You do the next best thing—you invest in a way that gives you exposure to things that scale.

Of course, depending on where you are in the cycle, that could be profoundly bad advice. The outperformance of growth over value has reached absurd levels, and I’m actually more interested in investing in businesses that don’t scale. As a corollary, Dave Ramsey’s advice to allocate 100% to growth has been terrific over the last ten years, but perhaps not going forward.

So again, if you can’t scale, and you can’t switch jobs, and you are stuck making the doughnuts, then you are simply going to have to save like nobody has ever saved before.

A quick aside here: starting next week, there’s going to be a whole bunch of special reports and presentations coming your way on investing in the current environment (and in the future). They’re from me and the other Mauldin Economics editors, and there’s a lot of really good stuff in there. So if you’re wringing your hands about investing right now, you should watch your email, starting Monday.

One Final Comment on Luck

I got a few sour grapes on last week’s piece about wanting to make money.

Some people said that no matter how hard some people try, they will not be able to make money (which is a polite way of saying they are dumb, or oppressed, or something).

Some people said that I completely ignored the role that luck plays in making money.

Let me say again: anybody can do it.

Luck plays a role, but you have no control over it, so for most people, it is just an excuse not to try. Poor is a mentality—thinking that you are dumb will ensure you stay poor. Thinking that you are oppressed will ensure you stay poor. Thinking that you are unlucky will ensure you stay poor.

I am sure of one thing—if you stay in your apartment playing video games, luck will never find you.

Jared Dillian
Editor, The 10th Man

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