Personal Diversification

Markowitz/Fama portfolio theory is shaky in its assumptions and reliance 0n estimating parameters that are difficult to fully understand (especially with tail events), but one insight is useful – diversification. However, blind diversification is foolish and securities are really their own form of derivative – a derivative of the business operation itself. You can, however, diversify cash flows that have correlations that are easier to estimate than asset prices, at least heuristically. However, there is little need to over-analyze or “forecast”  – I advocate a loss limit on any new venture and conservative testing methods of a change in the business model or decision process. In many cases, common sense and intuition can drive your diversification strategy.

For example, I tutor and run a vending route, and also run a frozen drink machine rental company, Atlanta Freeze. My cash flows are diversified in that downsides to one does not hurt the state of another, and they sometimes share the upside. For example, vending is fairly steady overall, but many individual locations are very seasonal. The business self-diversifies around the seasonality by having a certain selection of clients/locations.

Tutoring and AF are almost inversely seasonal – the colder months tend to be when students are in school and need math or physics lessons, and the frozen drink rental business has far higher sales in warmer months, when people tend to party or vacation more often. If cash flow from one source diminishes, often the other will pick up the slack. On top of this, gains can be made from transportation economies of scale, i.e. stopping at a vending machine or two on the way back from tutoring (and locating new machines alone usual tutoring routes) to optimize profit per gas mile across jobs. An additional gain from networking is available – clients in one business/profession that have benefited from my work are more likely to use another product/service through me.

I will be writing a review on Nassim Taleb’s new book, “Antifragile”< but I want to process my thoughts on the book a bit in order that I may write a comprehensive review. Many reviewers tend to focus on one aspect of the book as it relates to their viewpoint (i.e. medicine, business, politics) but the book is really a much deeper concept about the properties of systems and interactions. It is essentially the decentralizationists “manifesto” at this point and I have held this view in an incoherently constructed form until this book, so I have much more to say on it than most and will be writing a lengthy review.The following is based on some of the concepts from this book.

This diversification of cash flow essentially makes the entrepreneur resistant to large shocks, gives him information and should ideally be constructed to be dynamic with decision heuristics rather than strict business plans and guidelines. In contrast, the “all-in” entrepreneur (often a “tech” start-up that faces very unique parameters and highly asymmetric payoffs) and the 9-5 worker are more fragile – the “all-in” entrepreneur suffers both from early instability and risk of total failure (as subsequent losing of life savings), and the 9-5 working is very stable until you lose your job, then it is again a total loss of all income streams less unemployment pay – a blowup. Now, the “all-in” entrepreneur is usually the one that has the largest positive payoffs, but the problem is that people tend to start with too little backup/cushion capital. Learn business at a level where you can tinker a bit and perhaps integrate concepts and ventures so that negative shocks are offset but you can gain positive emergent properties across ventures.

Advertisements

Personal cash flow and the non-linearity of time=money

The fiscal cliff continues to loom and panic has set in. While unemployment is steady at 7.9%, real median wages have been falling (and the distribution of real wage losses are heavily skew right). Much of this is a function of the structure of the economy. For most employers, well developed, specialized skills are in greater supply than demand, so companies are able to be fastidious and  will usually not hire based on potential. No need for long term investment in training; just hire someone with the skills in the present that can be thrown right into the field.

Like most strategies in the corporate world, this makes significant short term sense at the sacrifice of long term benefits. But that is not the point of this post. This is a reality that no institution or powerful individual can change – a force much like demographics; long term cyclical progressions without recurrence at the same state due to dynamic parameters of economic existence. The more appropriate response is to accept this fact, and develop skills and cash flows accordingly. While many in the “9-to-5” grouping tend to never think of themselves as “entrepreneurs” or “business people”, these are ultimately just labels for difference cogs of the same general machine/system. They are simply the group that has traded time for money in a linear fashion. This is often a great idea- nonlinear functions tend to have regions where the response functions grows (or decays) much more slowly or with more uncertainty than a linear function. While the goal in entrepreneurship is to reach the point where input time is almost decoupled from profit output, it often works against you where a massive input of time can lead to very small, uncertain profit output.  I consider “risk” to be simply the transformation of money as a nonlinear mapping of the time=money function.

Yet the two are not mutually exclusive. A steady income is important, and should be sought after for educational purposes, discipline and capital. However, do not fall into the trap. The wanna-be entrepreneur who dreams of starting their own business simply to “be their own boss” will probably lock his or herself into a comfortable, low-risk track. However, the true entrepreneur-at-heart will simply see his or her “9-to-5” or at least steady employment as a moat of safety, a further education, and a means of building capital. They will parlay all these resources into other ventures, assets and cash flows. This is in a sense the ultimate form of diversification – a portion of your “time” portfolio is dedicated to a linear occupation (hopefully one that is selected to grow the individual) while another is dedicated to the nonlinear pursuits.

So how does one do this? I am not an expert – I am merely in the thick of the journey. First, build you core competency and skill-set. Try to not tie your degree toward a direct career path, but toward a specific skill that will serve you in an uncertain world – one with economic value that you can turn to when needed to scrounge up meals and stay liquid. Build a tree of skills around this core competency and integrate. This will make you more adaptable in finding a job that will suit both you and the employer. For example, I gained a B.S. in Economics and a minor in applied math, but have focused heavily on the mathematical skills to parlay my education rather than let it go to waste. I made the mistake of student loans for an out-of-state school, so I need my education to at least pay me knowledge dividends. If the ability atrophies, it was all for naught. Keep my mistake in mind and go forward accordingly. I am doing independent research in a variety of fields and spend time learning R, Python and Excel for data analysis and SQL for database management. This tree of skills fits well into both personal pursuits and the skill requirements of employers with a core of mathematical understanding.

Further dividends can be extracted if one is resourceful and hard-working, with a heavy dose of creativity. I tutor part time, which allows for a very flexible schedule, gives me a skill I can turn to in order that I may pay bills and build capital , is fulfilling, and keeps my mind sharp. I also build a de-facto network that, if I add significant value, is more than willing to listen to me about other things (for example, I have had referrals for other businesses from satisfied tutoring clients). This is just my personal example – be creative and choose to spend your time building your “skill shell” around your “core competency”. In my next post I will list some possible examples for a few different possible “person-states” I can think of that are congruent to my model. The only requirement is to be hard working and strong willed, not lazy or easily discouraged.

 

Happy Holidays

-the UE

 

 

 

Back with a Vengeance

I’m gonna start this old blog up again… Internet needs moar original content, there’s way too much content reproduction and aggregation these days. It seems like every month the (Recycled Content/Original Content) ratio becomes larger and larger. And im 50% smarter and 23.8% more math-y, so itll be ~ 36.28% better.

As Jeezy says, Lets Get it

Strife

Just got a call earlier today about one of the locations for my machines closing down. Unfortunately, the previous tenant went out of business and was unable to make rent payments to the commercial owner. The location was slow but steady due to a lack of other candy options and the fact that most customer stayed for over an hour (it was a billiards hall). What sucks about this is that I can’t just go and grab the machines – I need some form of documentation that I own them. I am renting them from someone who in turn bought them used, so there is no original receipt or anything – I only have the keys to prove that I own it. I am hoping to negotiate something with the landlord over the next week to prove the machines are mine and pick them up, but I may end up out of luck. As I said, they are machines I rent, so I will be liable for their loss to the tune of about 300 dollars up front. Keep in mind this is a 1200 dollar a month business with only about 500-600 in profit after rent, candy costs, commission to site owners, gas, and various random costs. Ah well, such is business! I will need to find a way to better document my ownership of the machines, or try to do a better job communicating with the store owners.

Anyone have start-up stories of incredibly annoying and spontaneous costs that come out of nowhere to hit your pocketbook/bank account? Please share, and share what you’ve learned!

A Wake-Up Call

A new Pew Research Center poll shows that more than 2/3 of the nation distrusts the federal government, large corporations, banks and congress. Who do they trust the most?

According to the just-released study by the highly respected Pew Research Center, small business is the most trusted institution in America. More than churches. More than colleges. More than technology companies. And certainly more than labor unions or large corporations.

So why does the entrepreneurial class not have more power or influence in our society? They create jobs and represent the common man trying to make his way on the economic battlefield. But they have little time to try and win political influence because they are too busy working to overcome the deck stacked against them. Along with being the most trusted institution, small businessmen are also thought to be the group with the least attention given to them by the government.

But we’re neglected. When asked about which groups were getting too much or too little attention from the government, Americans felt small business was getting dealt the worst hand. Hey, elected officials, listen up! Small business is one of the few groups Americans want to get more government attention.

Of course, this will never change because labor unions are a much more surefire voting bloc and large corporations are a reliable campaign contribution. So it goes in the great Republic. This is a good reminder of our mission here at the Underground – to help reignite the animal spirits and provide a voice for entrepreneurship and inertia for an economic revolution. I am one of the last people to advocate lining up at the government trough, but I also believe government on every level has made it a much more difficult task to get a successful enterprise up and running. Action by inaction would be the best way governments could help us out. In fact, government and many of these other favored groups have interests quite contrary to that of the entrepreneur. For example, see Trash Collecting Entrepreneur Squashed in San Francisco from Mish’s Global Economic Analysis blog. The entrepreneur can perform tasks much more efficiently and at a much lower cost than the bloated public labor unions. But of course, political power is all that matters in the United we Fail Bailout States of America, and so of course the labor rackets will have their day to make sure they can get their lifetime pension benefits and bloated salary on the private sector’s tab.

Some Excellent Links

First, some Daily Reading (which I will add to my Blogroll

www.zerohedge.com is always a favorite – alternative financial and economic news with an anti-establishment bent. Our focus here at Entrepreneurial Underground is on the decentralization of political, economic, financial, information and social systems, which is inherently anti-establishment. Read ZH daily!

goldismoney.info – this forum used to have one of the best forum post i’ve ever read – Bartering and Horse Trading. It was 26 pages of some of the most mind-expanding advice I’ve ever read. The premise to take basic skills of deal making and social networking to become a used goods trader … but it went FAR beyond that. Its ultimate premise was to realize that there are ALWAYS opportunities of every sort and that the key to success is to persevere and keep looking for good deals – of any sort. If I ever find a copy of it, I will be sure to post it.

globaleconomicanalysis.blogsplot.com – Mish Shedlock’s economics blog with a focus on the recession and financial crisis. Very good reader discussion and very good coverage of the economic crisis all from your local government to Asia and Europe.

more to come

The Beginning

Getting the first post out of the way – I suppose I will start with some anecdotes and personal experiences that I’ve had thus far. My goal will to eventually start conducting interviews with local entrepreneurs and get other perspectives, but for now here is my own. I work as both a tutor and a vending route operator. You see those gumball and candy machines placed at restaurants, grocery store, bowling alleys, coin laundries, break rooms, etc…. I am the person behind that operation. Its a good time investment, as startup costs are low, income is nearly limitless and operating costs can be kept down with intelligent planning and logistics. It is a great source of income on a per-unit-time basis. The benefits that can be captured are also nonlinear –  you can double or triple the income of a route with less than 50% increase in operational costs. I will share more about this as time goes on and will start documenting and collecting data  – I am a statistician after all.  Expect presentations over the summer.

I also do test prep as a part time job. It’s a very good hourly wage and I enjoy it – quite rewarding. I would recommend it – I started doing it on the basis of a quick tip from a friend. Turned out to be a great choice of part-time jobs, and is by far the best part time job for a college student. It is also a nice fall back if current job market conditions do not improve before I graduate (more on that later.)

I value flexibility of time and believe time management and the capturing of nonlinear benefits from proper time and money management. This will be a major theme of this blog. I believe small business, low start-up cost, vertically integrated, high tech micro-entrepreneurship will be the recovery leader if there is to be one to bring long-run growth back to roost. Social networking, specialized, low cost service firms and technologies such as cloud computing allow for more flexible business models with options to balance operational and fixed investment costs that help keep costs sometimes orders of magnitude lower if properly utilized. This limits risk and helps keep the entrepreneur afloat for longer. When hardships come, humans are an innovative and resilient species. There are always opportunities, and there are always bright minds able to discover and monetize these opportunities. I hope that Entrepreneurial Underground can be but one element of this innovation revolution that is necessary to jump-start the economy and give power back to the people.