Graham’s Note: This is an excerpt from my latest issue of Private Wealth Advisory in it, I note that despite a global wave of deleveraging there will be tremendous opportunities to make fortunes for those who are able to think creatively and innovate. To learn more about Private Wealth Advisory and how it can help you grow your portfolio and navigate the coming changes to the global economy and capital markets… Click Here!!!
As noted in yesterday’s article, the developed world will be entering a period of lower global growth for the following four reasons:
1) Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce.
2) Excessive debt overhang.
3) A return to more frugal “common sense” spending patterns in the developed world.
4) Political and Geopolitical uncertainty.
This backdrop is going to engender dramatic changes in the way people choose to spend their money. However, while the “across the board” perspective looks quite bleak, there are going to be truly outstanding opportunities for wealth creation available to those entrepreneurs and businesspeople who are able to think creatively.
The most critical aspects for all businesses going forward are:
1) Selling an experience, NOT a product.
2) Respecting your clients with the intention of building a long-term relationship with them.
3) Using innovation and creativity to navigate shortages of capital.
4) Passion, hard work, and determination.
Regarding #1, the days in which people will buy things simply for the sake of buying them are over. Having been to trade shows and other similar events since the Depression began, I always noted that those vendors who are offering a “widget” based solely on the idea that people have needed that widget before are going out of business.
However, those businesses that are attempting to create an experience for their clients, are finding that people are still willing to pay good money for something that has a strong emotional impact and/ or will provide them with memories.
I will give you a personal example from a dining experience I had in 2011.
Back in November 2011, my wife and I had dinner at Michel at Tyson’s Corner, one of the most recent restaurants opened by legendary French chef Michel Richard.
The food was exemplary, a kind of French-American bistro gone uber-gourmet. However, the highlight of the night was the “chicken” we had for dessert, one of Richard’s signature, whimsical dishes.
See for yourself.
It was extraordinary. The combination of textures and tastes was beyond anything my wife or I had seen in a dessert. Adding to this explosion of flavors was the fun of eating “chicken” as a dessert food and this was possibly the most memorable dessert of our lives.
Indeed, this was more than just a dessert, it was a marketing tool for the restaurant as a whole: as soon as our order came out, every table around us ordered one too. By the time we left, I counted six other tables having “chicken” for dessert.
In plain terms, we ordered a dessert, but Chef Richard delivered an “experience.” My wife and I laughed and shared many delightful moments as we butchered our “chicken.” Because of this, I didn’t care that the dessert cost $12. In fact, I probably would have paid $17 or more for it and not even batted an eye.
Now, compare this to your average dessert (brownie, sundae, etc) at most restaurants. How often do you find yourself remembering a random dessert you had months ago? From a business perspective, how many times have you found every other table around you ordering a dessert after they see yours?
This is what I mean by selling an experience. It’s no longer about products, it’s about creating memories and emotional experiences that touch people. That’s where the money will be going forward.
I’ll give you another example.
At a recent dinner party I struck up a conversation with a young entrepreneur who had recently attained an MBA from Harvard. One of his classmates was Will Dean, a former British counter-terrorism agent who competed in marathons, triathlons and the like.
Dean was bored with the average fitness course, so he decided to launch Tough Mudder, a 10-12 mile fitness course that is based on the kind of courses and challenges he had to overcome during his training for the British Special forces (we’re talking about 12 foot walls, underground mud tunnels, etc).
The company’s entire start up cost was probably less than $50K: all they had to do was rent a track of land and build and dig the obstacles (walls, tunnels, etc.).
However, people all over the country have lined up in droves for the experience of pushing themselves to the limit at one of these events. The whole thing is like an enormous playground for adults. It challenges you physically, mentally, and emotionally.
And people are willing to pay north of $150 per pop to participate. Spectators have to pay $50 just to watch. Small wonder that the company made $2.2 million in revenues in its first year and $22 million in its second year. That’s $22 million in revenues, from a glorified fitness course, that was launched DURING the current Depression.
This is what I meant by innovation and creativity finding pockets of wealth. Will Dean saw a niche in the fitness industry (an event that was more challenging and less monotonous than traditional marathons and other fitness tests). He then moved to capitalize on that niche with minimal risk by keeping his start-up costs to a minimum. And today he’s sitting atop a $20 million business with numerous corporate sponsors.
You can learn more about Tough Mudder here:
Dean’s story shows, in no uncertain terms, that if you’re able to think creatively about pre-existing industries, you can make an absolute fortune, even during times of severe economic contraction.
The above two examples concern generating value for entrepreneurs. My final story pertains to seeking out wealth generating opportunities from an investing standpoint.
The financial markets today are heavily if not completely reliant on Central Bank intervention. We now have a time in which virtually every traditional asset class under the sun is overvalued and susceptible to a crash (this is even true for Gold if we get another 2008 event).
With that in mind, investors are going to need to look outside of the capital markets for opportunities to generate returns. Indeed, I fully believe that performing assets (things like lead mines, shopping malls or wood mills) will potentially offer better returns than stocks for instance.
I’ll give you a final example.
A friend of mine is a master baker. Having trained both in the US and in France, he’s now at the level that Yale and other large organizations hire him as a consultant to design their breads and pastries.
Recently my friend told me that he had decided to launch a new bakery (he sold his last one several years ago). Given his reputation, skill, and earlier success (he’s run several very successful bakeries in the past) he would have little if any trouble raising capital for the business.
However, rather than seeking out loans from a bank or other financial entity that would want a claim on his private assets in return, he’s chosen to raise capital from private investors. And he’s offering a 10% yield on all loans.
This is a heck of a return relative to most savings accounts (0.15% at best) or even Treasuries (the 30-year yields less than 4%). And he’s only looking to need the money for 1-2 years before paying it back.
Thus we have a serial entrepreneur, with a nationally recognized talent, offering investors a 10% yield on loans made to fund his latest venture. Having seen his spreadsheets and projections, even by extremely conservative estimates his business should be producing close to $500K in EBITDA within the first three years.
As I said before, there are opportunities to generate value in the real economy today, outside of the volatile and manipulated capital markets. With that in mind, all investors should devote some time over the coming months to seeking out investments outside of what’s on Yahoo! Finance and CNBC. I fully believe some of the greatest opportunities available today will be in the real economy, NOT seen on a stock screen.
If you’re looking for actionable advice on how to play the markets as well as real-world business ideas on how to generate wealth in this tough economy, I suggest checking out my Private Wealth Advisory newsletter.
Private Wealth Advisory is my bi-weekly investment advisory published to my private clients. In it I outline what’s going on “behind the scenes” in the markets as well as which investments are aimed to perform best in the future (both in the capital markets and in the real world economy).
My research has been featured in RollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.
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Chief Market Strategist