Craig: Hi, this is Craig Ballantyne from EarlytoRise.com and I am here with my friend, Simon Black. Simon and I do the Blacksmith Camp every summer in Lithuania. It’s the Liberty Entrepreneurship Camp. This is going on our eighth year. We’re going to talk a little bit about it today but we’re also going to take some questions from our past attendees about their advanced business questions. It’s going to be really great and I’m going to ask Simon for his expertise. How does that sound, my friend?
Simon: Are you asking me how that sounds?
Simon: Like I couldn’t be more delighted.
Craig: All right. Why don’t you give us a brief history of Simon Black? I’ve been reading your work since many, many years ago.
Simon: I like to take long walks on the beach. No. Look, you summed it up. We’ve been doing this for—I can’t believe it’s been eight years. I hate to be trite but where did the time go? I mean, eight years. Wow.
Craig: It went all over the place.
Simon: Yeah, it sure did. Look, I mean I’m the co-founder along with our other colleague who does this, Matt Smith, of SovereignMan.com which is the thing that probably a lot of people know me for. And we focus on international diversification and asset protection on that website but I do so many other things. I founded a few years ago what is now really one of the largest agricultural companies in Latin America based right here in Santiago, Chile where you and I are sitting right now in my office in Chile. I own a boutique private investment bank, a number of private companies that I purchased through our in-house private equity fund, so a lot of things that I have been involved with over the years. Again, I think the most important and most exciting certainly has been eight years of Blacksmith Liberty Entrepreneurship Camp. So I’m looking forward to this year and let’s get with the questions.
Craig: Well, tell us a little bit about the camp for people that might not have attended and may be interested.
Simon: Sure. Well, the camp again is something that we started eight years ago. It’s has really evolved, I think, a lot of over the years. I always say this every year. You see me stand up in front of these guys and say it gets better every single year. Every year, I say this is the best one ever and then the next year, I say it again. And it’s true. It gets better every year.
Craig: It’s not because we get smarter. It’s because the people that attend are better.
Simon: That’s true but it’s also because we do get smarter. Every year, you and I have done more things. We have more experiences. I remember last year or the year before, I was on the phone and I was doing the deal with a $150 billion private equity firm and that’s not an experience that I’ve had in year 1 of the camp. So that was an experience I got to take in front of the group the following year and say here are the things that I’ve done in the last year that have made me better, as a person, as a business person, just in life in general and we try and impart those lessons. But that’s ultimately what it’s all about.
We started this in 2010 and the whole premise was to take really young people from all over the world and try and teach them as much as we possibly could about how business really works, the sort of things that you just don’t ever learn in business school or in class, and things that maybe you might be able to sort of grind it out on your own over years and years at a time and a learn on your own but the whole idea is to short-circuit the process, just to get light-years ahead of that by being able to learn from other people that have been able to do this before you and learn from all of their experiences. So that’s really what it is. It’s mentorship. It is really, I would say, experience-based deep lessons in entrepreneurship.
And by the way, we talk about this on the site and you can see this for example, at SovereignAcademy.org, BlacksmithCamp.com, we have a couple of different websites for it; they all point to the same thing but when we talk about it on the site is that I fundamentally believe that entrepreneurship is state of mind. It’s fundamentally about creating value. The average person looks at problems and complains and bitches about things. I think it’s in our human nature to become accustomed to problems, to accept problems.
The entrepreneur, the entrepreneurial mind-set is not one that accepts problems. It’s one that constantly asks the question, how can I make this better? And you don’t have to start a business to do that. You can do that as an employee, as a factory worker, as a schoolteacher, as a self-employed professional, as a professional investor, dare I say even as a politician. There are so many different ways that you can apply that “how can I make this better” mentality. How can I add value? That’s the entrepreneurial spirit. That’s the mind-set.
People think it’s about taking huge risks and so forth. I don’t actually agree with that at all. I know a lot of phenomenally successful people that have started businesses and did so not by taking big risks and swinging for the fences but being deliberate and methodical and constant self-assessment to see how they can improve, how they can make themselves better, how they could make the products and services better and so forth. That’s really what it’s all about. That’s what the weekend is all about.
The last thing I’ll say about it is that it’s a phenomenal networking opportunity. You meet 50 other people that are just like you, that see the world in a similar way, that are motivated, winners. It’s just an incredible thing. We’ve called it a youth entrepreneurship camp for so long but I think the older that you and I get, the more “youth” is a relative team. I think last year our average age was probably around 28 but we had people from 17 through mid-40s. It was, again, the best year we ever had. I hope that adequately summed up the—
Craig: That does. That does. I mean it really is an incredible bringing together of people. It’s impossible to describe exactly. So that kind of leads in to the first question which was from one of our past attendees, Mike, who has about $2 million-business selling on Amazon. He asked me, “What is the balance between being aggressive and taking calculated risks to grow versus putting too many eggs in one basket” or what he called gambling? Kind of a follow-up to that is—I know we’re going to talk about testing—how would one test properly, test small?
Simon: Yeah. Mike is great, one of the many, many great success stories from Blacksmith Liberty Entrepreneurship Camp. He came in, had a solid business but has just grown phenomenally in his business. Mike is already an incredibly smart person and we’re really proud of him in what he’s been able to do. These are great questions and it goes back to what I said earlier. There’s a common misperception that entrepreneurs, to build a business you have to take this huge risks and so forth and I just don’t really believe that.
There’s a difference between I would say risk and uncertainty. Risk is fundamentally something that you can control, something that you can hedge. Uncertainty is a lack of information about what’s going to happen next and I think the mark of a good entrepreneur is to be able to turn uncertainties into risks and then be able to control those risks, to be able to reduce those risks. I would also submit that while a great entrepreneur can take a lot of steps to reduce risk, fundamentally an entrepreneur does have to be comfortable with some degree of uncertainty. An entrepreneur has to be comfortable with some uncertain outcomes and this is something that does, in a way, go against our nature.
But again, the name of the game is really to try and understand, to try and turn as many unknowns unknowns into known unknowns and then take steps to actually reduce those risks. You mentioned testing. Obviously, this is something—if you’re launching a product, for example, Mike has an e-commerce business and sells a number of products online and it’s been a great business. If Mike were to go out and decide that he wants to sell a new product, especially if it was a new product that was out of his sort of existing wheelhouse, that would be something that’s clearly a lot of uncertainty there so the whole idea would be to try and do a lot of testing initially to determine, is this something that he’ll be able to sell to his existing list, something that he’ll be able to develop the skills internally, to be able to sell to new customers? And that’s really where testing comes into play, to try and in the most cost-effective way possible to be able to determine if customers are actually willing to pay for this product.
Craig: So do you have any examples of where you took a risk or gamble that backfired on you? And knowing what you know now, would you be okay making the same decision again?
Simon: Well, my biggest mistakes, I like to think that the older we get, the more mature and the more lessons we learn and the fewer mistakes we make. Although we’re always going to continue to make more and more mistakes over time, hopefully we don’t commit the same mistakes over and over again. The mistakes I made by far were when I was younger and I thought I knew everything that there was to know. I was just this hotshot, badass who could do no wrong. I made some huge mistakes.
I had this real estate development and I was so convinced I was right—you know this story; I tell it every year—that I didn’t bother trying to test it. I didn’t really bother trying to go out into market to sell it and see who could give me deposits and who would really buy it. I was so convinced I was right I went out and spent a lot of money buying this land and putting all this stuff together. And then when it was finally done and ready to sell, all I heard were crickets chirping. So that ended up being a dismal failure. I lost a lot of money on that. I did actually go out and everybody that invested in my deal I went out and pulled the money out of my own pocket to make them whole but that was an extremely expensive lesson for me and I learned painfully, the hard way, that that was a stupid thing to do.
- A) I didn’t know anything. I knew very, very little, in fact. And looking back, what would I do differently? Clearly, I would have gone and actually tried to test that. And there are a number of ways to do that. Look, it depends on the industry. It depends on the product. I depends on the country that you’re involved in. There are a lot of places that have pretty serious regulations that go against things. You can read this stuff. Tim Ferriss talks about this in one of his books. One of our instructors, Cliff, talks about this. Putting something on the internet, trying to sell it, running a sales page, trying to get clicks and sales and seeing how much you get before this product even actually exists, there are a lot of places where that’s not allowed, it’s illegal and so forth.
So it really depends on the product, it depends on the service, depends on the jurisdiction and so forth. And you have to work within the rules that you have available but to figure out essentially what’s the most cost-effective way you can test something and determine if it’s actually going to be a fit. From a big picture perspective, that’s the reason that I lost so much. It’s because I just totally ignored that obvious just common sense approach to it because I was convinced I was right and that could be a very dangerous thing.
Craig: Take a look at lot of consumer good products. You go all the way back to like Nike and the guy is selling the shoes out of the back of the trunk. A lot of these people started out that way. Most people think oh, I got to go and get this minimum order and I’ve got to invest all this money but no, you just go and you start very, very small. What wouldn’t millennial Simon do today? 25-28-year old Simon fancy free to go anywhere in the world or do anything you want, what would he do? What would he learn?
Simon: The most important thing, and we talk about this every year at the camp, is to learn as much as you possibly can. Robert Kiyosaki talks about this a lot, this whole idea of the cone of learning. I thought he was great. I spent a lot of time with him. Talk about being able to learn a lot. This whole idea of cone of learning is you learn and remember a certain portion of what you listen to versus what you read versus all these things, and what you find is that the best way you actually learn is to learn by doing, but even more importantly, to learn by doing under the guidance and instruction of someone else who has mastered whatever it is that you’re trying to learn.
So younger Simon, if I knew then what I know now about it and I wasn’t so pompous and arrogant about it, I would have really gone out of my way to learn as much as I possibly could before I made some of those costly mistakes and actually sought out people that were in those businesses that had achieved massive success and really devoted myself to learning that, putting the time in.
One of the problems that I see—and I think again this is human nature; I’m not going to say this is a millennial thing or a gen X thing or anything—as our technology progresses, I think people in general have become more accustomed to instant gratification. You push a button and that reward comes in. We get that dopamine fix as long as the download is complete and all that sort of stuff. It has almost programmed us to not want to put the time in anymore and that we expect the reward much, much faster. It’s like hey, I’ve been studying this for three days now; I should be an expert. The reality is that—
Craig: You put in your time.
Simon: I put in my time. That’s right. I put my time in. I put that two months in. The reality is just that I don’t think you can go into something as important as learning, as important as education with a fixed idea of if you’re looking at it in terms of how much time do I have to put into this in order to sort of get X out of it? I think you’re really missing the point. Really, learning and education is a lifelong thing. You and I and Matt and everybody, we go out of our way to spend time with people that are in many respects even much older than us. I mean I spend a lot of time with guys like Jim Rogers and Robert Kiyosaki and so forth because I just learn so much from being around those guys. You have similar relationships and Matt has his relationships. We all spend time with people that can teach us more. And it never stops. It’s a lifelong thing.
I would say that, we were talking about this earlier, this idea of we’re talking about investing a lot and then people usually think about investing with respect to I put in X and I get Y out of it, looking to make a return on capital, to make more money. Well, your best return that you’re ever going to make in your entire life is the return on the time that you invest in yourself. Sometimes, it might take a little bit of money but really it’s a question of time and the time that you invest in yourself in learning those skills is something that will generate a lifelong impact and return on an investment in that time.
So going into it, trying to say okay, I only want to spend or I only have three days, it’s a ludicrous approach. So yeah, I think younger Simon from 15 years ago would just focus on that and try to learn as much as I could and look at it as an opportunity and not a cost.
Craig: Excellent. Now you and I are talking a lot about reinvention and a lot of our camp attendees that have attended three or four years and have had some success, now they’re even starting to okay, I’m ready to kind of graduate from this first business where I kind of cut my teeth and now I’m looking to have a bigger vision. What’s the importance of realizing reinvention and accepting that what you do now is only slightly connected to what’s next? And how do you know when to move on?
Simon: I’m a big believer in our own instincts in that way. I think we just sort of naturally feel it. It’s happened to me a lot. Where I am now is different from where I started. I hate to rob from Steve Jobs but he said it in that great speech at Stanford University that year. He said looking back, it has become so easy to connect the dots and it’s true. All these things, you might not know it going into it, you make a major decision to kind of move on a little bit from X and get into Y but they’re all sort of building blocks. No matter what you’re doing, you’re taking those lessons with you and I think you just sort of feel that there’s a pretty obvious opportunity.
I think one of the problems that we have, us as our species, is that we do—it just goes back to that idea of uncertainty—and that as human beings, we tend to be generally afraid of the unknown. That’s why people stay in their jobs that they hate and they work for bosses that they despise. They stay in bad relationships, sometimes even abusive relationships because we’d rather deal with the pain that we know than deal with the fear of the unknown, especially if you have something that’s good, that’s working, say a guy like Mike. He’s got a good business. He’s making money and some other opportunity comes along and it seems great but our own inertia can work against us because again it’s the fear of the unknown.
That’s something that with respect to moving onto big opportunities and so forth, I think honestly that just like the idea of launching a new product, these are things that we can go out and test just as easily. We can go out and try and gather as much information as we can and turn the giant unknown unknowns, into known unknowns, into known knowns. I’m paraphrasing Donald Rumsfeld’s spiel from all those years ago again. But that’s the idea. It’s to try and gather as much information as possible and get comfortable.
Craig: Most of them from mentors.
Simon: Sure. Absolutely. There’s no substitute for building a great network of people that you’re able to ring up anytime and say hey, this is what I’ve got; what do you think? I would also point out it’s a great mark of your own achievement when other people start seeking you out for that advice. What a tremendous privilege and honor that is.
Craig: So what do you look for exploring new opportunities? You’re going from eight-figure stuff to nine-figure stuff these days. What do you look for when you’re connecting with your future vision but also in minimizing the risk and knowing whether or not you have the skills to go at it?
Simon: I think it starts with pretty brutal honesty with myself about what I’m good at and what I’m not good at. The things that I’ve noticed I’ve been very successful at and the talents and skills that I have personally is being able to think really big, conjure tremendous visions of things that add value, really, really big thing and being able to generate a lot of resources around that, excitement and enthusiasm and capital and talents and so forth, and being able to just marshal all those resources around a really bold idea.
What I’m always looking for is the opportunity to do that in a way that is in alignment with my vision. You and discussed that at the farm the other day and I won’t have to get into that here. But with respect to sort of the let’s say more tangible business metrics and things like that, yeah, if there’s a way I can leverage the talent that I’ve got, the talent that I’ve built internal to the team and to the people that I have that is in alignment with my vision in the way that I feel like adds value to all the people that I’m trying to help, I’m interested in doing it.
What I look for in a business is something that I try to avoid things that are tremendously capital-intensive, things that eat up a lot of cash. If it’s something that I’m going to have to constantly be dumping money into year after year after year, I try to avoid that. I look for things that generate a lot of in accounting terms what’s called free cash flow, which is slightly different from profit but we don’t have to get into that right now. And I’ve learned enough to build on previous successes and at this point in my life try to not go off in a completely different direction.
I’m probably never going to be a golf course developer, for example. That’s just out of my area of expertise. I’m sure I could probably learn it. I’m sure I could probably gather some of the most talented people in the world and marshal the capital behind that but it’s very capital-intensive. It chews up a lot of cash. It’s just outside of the building blocks of where I’ve started, where I’ve come from.
Craig: One of the things that you’re really great at and Jeff Schneider and Matt Smith all have more experience in almost any of my other friends is in buying other people’s businesses. I think this is a really great opportunity if you are an expert in a certain business and there’s one that’s a competitor or one that will add value to your business immediately. But most people have no idea where to start. So a guy like Mike who might be able to buy another Amazon business or something even outside, what mind-set? Does he have to plan and prepare and all those things to buy a new business?
Simon: Yeah, buying a new business is a skill. It’s just like anything else. Starting a business is a skill. Managing a business is a skill. Driving an automobile and shooting a sniper rifle, these are all skills. They are skills that can be learned. These are skills that I’ve learned over time with experience. Sadly, I didn’t have anybody teach me these skills so I had to learn all these myself. I didn’t have the mentor who had a ton of experience in private equity and when I started again—this is going back now15 years or more—I thought I knew everything so I didn’t need any mentorship. So I just went out and ground it out on my own and just made mistake after mistake after mistake until I finally started learning the ropes. I still made mistakes. Even over the last several years, I made some mistakes but fortunately I’ve also made some very good decisions that have won out.
In a case like Mike’s, there’s an analysis involved. And again analysis is a skill but in private equity you can call it build versus buy scenario. Is it better, easier, cheaper, and faster for you to build it yourself or is it better to buy it? There are a number of qualitative factors that go along in that, some of that is the financial calculation as well but in general a lot of businesses these days, and it depends on the industry, you can go and buy an e-commerce website or even a personality-driven newsletter–type business, something similar to ETR or even Sovereign Man for—these things generally trade at multiples of their earnings or EBITA. If you don’t know what that is, don’t worry about it for now.
But essentially, it’s a multiple of its cash flow and how much money it makes and these things can range from anywhere from as inexpensive as 1x its cash flow to 4x, 5x, 6x. Essentially the higher that multiple, the more expensive it becomes and the riskier, the more risk you’re taking on for the same amount of work.
We always try and find businesses, enterprises that are high quality, places where we feel like we can take our existing expertise and grow it and not pay very much with respect to the earnings. We can talk about that more if you want or move on but I’ve got plenty of examples, if you want.
Craig: I will say see one example of maybe in the physical goods or maybe in the publishing world, something that a lot of people will relate to.
Simon: Well, I’ll just give you two to contrast them briefly. I bought a sports media site a few years ago. That was a total disaster, way overpaid for it, wasn’t making very much money and was buying—there was a lot of traffic, there was some goodwill there, there was kind of a basic brand but ultimately it just wasn’t really making very much money. My expectation was that we would be able to sort of reengineer that and in turn it into something that was really profitable.
That’s a very valid thesis but the whole thing is that you have to pay what something is worth now, not what it could be worth after you reengineered the entire business. So that was a deal that I shouldn’t have done and the only reason I did it was because there were a lot of personal circumstances involved, friendships and things like that. I just shouldn’t have done it. Looking back, I should have separated that. That was a big mistake. That was several years ago and that cost me a lot of money.
But on a flip side, did an e-commerce business recently. This was about 18 months ago or something like that when I got into that deal. That ended up being a leverage buy up. Basically, the owner was asking 4x their net income, basically 4x their cash flow and then amazingly enough some bank came in and offered to finance the vast majority of the deal. So I ended up paying more or less 1x cash flow for it. That’s a great deal. When you can get all your money back in a year or less, that’s a phenomenal deal.
So just two different examples just based on one, overpaying and you end up losing your ass and the other one, you get a great deal based on the existing cash flow; you do very well. So with enough time, patience and the right kind of analyses, those deals are out there. I think there are a lot of business brokers and website brokers and e-commerce business brokers out there now that do deals and they search for things, if that’s what you’re into.
Craig: I think there’s an area where a lot of entrepreneurs can get into trouble. They’ve made some money. They’re flush with cash. They came from nothing, like myself, and now they’re like what are we going to do with this money? Oh, it’s really sexy to go invest in other companies. So tell us the hurdles, the pitfalls there, what you should look for and some of the smart deals that you’ve made from as small as maybe the Sprayable one to even the larger, with the 4 Pillars with Tim, the company that you found there.
Simon: Look, it’s everybody’s dream to want to do that. You make a little bit of money. It’s a funny and hilarious thing. In Silicon Valley, for example, everybody wants to start a business, sell it and then be known as an angel investor. That’s the big thing. I remember actually having this conversation with somebody who was starting a business, looking for capital and actually told me, “I want to sell my company and be a hotshot angel investor.” I look at him and I say, do you even know what you’re talking about. Angel investing is phenomenally risky. It’s so risky and you sort of have this status that goes along with it that you’ve got money and people coming. When people come to you asking for money, yeah, sure, okay, there’s a little bit of an ego boost there but there are so many opportunities to lose all that money investing in ultra, ultra-risky deals.
We do occasionally do these, a lot of times just write these checks, not even never expecting to see that money ever again and occasionally some of them really do work out. I would encourage people. Look, if you’ve made some money, don’t be stupid. Don’t be stupid with the money and think that okay, I’ve got a good thing. It’s going to last forever so I’m just going to go burn this cash. I’m going to buy a Tesla.
Be smart with your money. You and I both came from a—I grew up very lower middle class. I never missed a meal but my parents each worked three jobs in order to pay the rent. No matter how much we make, I am vigilant. I see my American Express bill every month, I hit the roof and I go around demanding to people, what did we spend $149 on this? That poor kid inside of me never really leaves so I think it’s critical to be very smart and I think conservative with your investments and the things that you’re doing.
But yeah, the biggest thing, as you mentioned, I would just be extremely cautious with funds. Don’t think that because you’re sitting on a bunch of cash that you should just go out and start being an angel investor and so forth because what you’ll find is there’ll be a lot of opportunity to lose money. There would also be a tremendous sink on your time because chances are you’re probably going to be investing in people that don’t have the same skills that you do. So you’re going to put up 100% of the capital. You’re going to get 20% maybe, 15%, 10% of the business in exchange for putting up 100% of the capital and taking all of the risk. And on top of that, they expect that you spend 10 hours a month to help them out. In most cases, you’ll probably find better things to do with your time and money that are a lot safer and just don’t involve so many headaches.
Craig: You can just go down Kinkos and get a $100 box of business cards, put “Angel Investor” under your name. That’s probably better.
Simon: Yes, you’ll get the same ego boost that way. You can tell everybody you’re an angel investor and just say no to every deal.
Craig: Right, or put it on your Facebook profile.
Simon: If that’s what it’s all about. Yeah, exactly. Put it on your Facebook profile and get a lot of likes.
Craig: So we talked on the farm over the weekend about the bench press number of the business world and you’ve talked a little bit about free cash flow. So talk about gross revenue, what that really means and then why it boils down to free cash flow.
Simon: This is my next blog post for the camp website. I started lifting weights and since I started lifting weights, my buddy—I grew up in Texas—his dad bought him a weight set, one of the old school ones with the plastic weights and the little skinny bar that you give to little kids basically. So I got this. We were in fifth grade so I was like 10. I’m 38 now so it’s like 28 years of lifting weights. You know when you sort of first start out and you’re in high school and stuff like that, when people start lifting weights the thing everybody wants to talk about is, “Hey man, what’s your bench?” Everybody wants to know your bench press. As you get older, you realize that is one measure of strength but an extremely single-dimensional approach to your fitness and how strong you are. When guys are in their late 30’s and early 40’s, we’re not sitting around bragging about how much we bench or anything like that—
Craig: We can talk about this with them.
Simon: We did a little bit of that. But it’s the same way, I think, with a lot of business, especially internet businesses. I hear every internet guy I know who’s running a business online and they’re talking about their business and the number that comes out is always revenue. They go oh, I got a $2 million business or I’ve got a $500,000-a-year business and the next question out of my mouth is always, top line or bottom line? Revenue or profit? They say revenue. I said well, who cares about your revenue? Okay, revenue is like the bench press. It is one factor in your business but it’s not the “I bench-press 270 pounds” or whatever. Who cares? It’s just one factor.
At the end of the day, the revenue doesn’t really matter because the revenue is not the thing that puts food on the table for your family. It’s what you can take out of the business, not the income that goes into the business. It doesn’t matter how big your revenue if your cost structure is too high. It doesn’t matter. Or if you have to take all of your money or all of that profit and reinvest it back into the business, it doesn’t matter.
I did a whole podcast about this. You can look at a company. Even big companies have some the same structure. Exxon Mobile generates billions and billions, like $26 billion in cash from its operations but it has to take such a huge chunk of that and reinvest it back into the company, otherwise they’re dead in the water for the following year. That’s the example of the capital-intensive business that I want to avoid because I don’t want to have a business where I have to keep dumping money back into the company year after year after year. I like businesses that throw off a lot of cash and then it’s up to me what I want to do with that cash.
In accounting terms, that’s actually known as free cash flow, or even more specifically levered free cash flow. Levered free cash flow is essential because when you talk about profit and net income and things like that, profits much like bench press, perhaps like the deadlift is another measure of success but less relevant because profit actually has all these other things that include depreciation, amortization and even maybe changes in working capital, all kinds of things that only makes sense to accountants but not actual regular people.
The thing, the number that actually makes sense is how much money I have that I can take out of the business after all my reinvestments are made, after all the required capital expenditures, after I’ve paid down any debts and so forth. That’s called levered free cash flow. That’s the thing that I look at. To me, that’s the fundamentally most important number. It’s how much money I can take out of the business. That’s the thing I look at, not revenue. And I wouldn’t really be as revenue-focused. People are very revenue-focused early on in their businesses and that’s great. You’ve got to generate more revenue. But as your business grows and matures, I would encourage you to actually look at some other metrics of the success of your business and not just brag about how much you could bench.
Craig: Well said. You’re busting some financial myths here. Why don’t we talk about the truth about passive income?
Simon: It’s usually anything but. Look, we own $50 million worth of real estate down here. I’m not anti-real estate. I think real estate makes a lot of sense. One of the things that people like to do with their money when they start generating a little bit of cash flow, maybe taking money out of the businesses, they’re looking for investments. They’ll say I want to go buy some real estate. That’s what everybody talks about. I want to go buy some real estate. Look, that can work out really well for you but real estate is an example of something that can be very capital intensive. Say you’re going to buy an apartment somewhere, you might have to come up to $50,000 to $100,000 just for the down payment. Then you’ve got debt, which by nature I just dislike debt. I guess my lower middle class upbringing, that’s still persistent in my life. I just don’t like owing money to anybody. But that’s sort of part of the deal in real estate. It’s just going into debt.
Look, if you’ve got $50,000 to put up as a down payment, that’s a lot of money for most people. So you’ll put down $50,000, maybe even have a couple of hundred thousand. But even still, you might be able to afford one house, two houses or three houses. It’s expensive, right? So let’s say you go out and you buy this one house and you’re thinking I’m going to get passive income from my rental property. Okay, great.
And then the hot water heater goes up. And then the roof needs to be replaced. All this kind of stuff happens. Okay, even still. Maybe you’ve got a great manager that keeps it all completely turnkey for you and you don’t have to lift a finger and they’re handling all this stuff for you. Okay, great. Maybe so. But even still, again, like your air-conditioning goes out and it wipes out all of your profit. All of your free cash flow for the year just gets wiped out.
Again, this has nothing to do with real estate. I’m not negative on real estate. We do very well here on real estate. We got a lot of real estate. The difference is it’s all about scale. I think the same rule applies to business or even a lot of different investments. If you want to be successful, you have to get to a certain point where you achieve scale. If you’re only selling one product to one customer, it’s going to be really hard for you to meet your costs and so forth. But if you’re selling a lot of products to a lot of different customers, then you’ll be able to afford to scale up your staff and be able to afford the best content producers in the world, the best copywriters and all those sorts of things because now you can actually afford it because you have the scale to build in this lethal, incredible team of people that are going to help you become more and more successful.
If you have one house, you don’t have that kind of scale. If you had 1,000 houses, or 10,000 houses or 50,000 units of apartments and office properties and so forth, then okay, yeah. Now you’ve got so much scale, you’ve got teams and teams of your own in-house management and your own contractors to do the repairs which means now you’re cost-effective. You’ve got that economy of scale to lower your costs and increase your efficiency and all sorts of things. Now you’re talking about something that makes a lot more sense.
If you go out and you have this one thing, now all of your hopes and dreams and all of your potential successes are tied up in this one thing. If any one thing can go wrong, now you don’t have the scale to be able to mitigate that. Again, it comes back to risk and how do you mitigate that risk? You mitigate those risks through achieving scale.
That’s fundamentally I think the problem with passive income. People try and go out and generate passive income with a lot of times, real estate, with things that are very capital-intensive but they don’t achieve the scale. They don’t have the scale and so they’re taking a lot more risks than they probably realize. It’s why the income in many cases isn’t really that passive after all. When it’s done right, it can be a beautiful, beautiful thing. I think real estate investing has made many people extremely wealthy and it makes a ton of sense but I think you have to go into it with eyes wide open and understand there’s a lot to learn and there’s a lot of scale that needs to be achieved. I think that holds true with anything, with any investment and any business.
Craig: All right. So we talked about having some hard skills and numbers and all of that great stuff. Now one last question I wanted to ask you is what mind-set do you have when times are tough? People that are just getting started and they’re not sure exactly what to do, a lot of them like you and I discussed over the weekend have that scarcity and fear of losing everything mentality. So how do we fight through that and stay focused on making the right decisions that matter?
Simon: I think a lot of people would be tempted to sort of say oh, I don’t have that. A lot of successful people might be tempted to say that. The reality is it’s just bullshit. I think I don’t know a single successful person that hasn’t had that internal fear and self-doubt.
Craig: Even when they’re successful.
Simon: Yeah, even when you’re successful. I mean I remember reading and we were talking about some over the weekend. George Soros, a phenomenally successful investor grew up in the olden times, hyperinflation, the Nazis and all this. He’s a rather controversial figure and we can save that for another time. But the point is that even a guy who’s a multi-billionaire would oftentimes live in fear of losing everything. In many cases, this fears are completely irrational and unjustified and I think that the mark of the successful person is to be able to sort of go back to that, try and push out the irrational parts of fear.
Sometimes, fears are actually quite reasonable and rational. Things aren’t going well and that causes a lot of stress and anxiety and rightfully so. The rational person, the successful person will actually ruthlessly analyze that, try and truly understand. Why? What am I afraid of? What specifically am I afraid of? What’s going wrong? What are the actions that I can take to resolve this?
And then actually take those steps to execute it. The will to act, the discipline and transparency to be honest with yourself, to be absolutely ruthless with yourself and realize that I’ve been screwing up, I haven’t been doing the right thing, I made a bad mistake here, I’ve been lazy here, I haven’t done this thing that I know I’m supposed to do, etc., and now I’m paying the price for it. So okay, how do I fix this? How do I turn around? Deep down, most of us, we usually know what we have to do. So it’s the ability to be honest with ourselves and then that discipline, the will to be able to execute and to take action, that’s the thing that makes all the difference. It’s being able to eliminate the irrational fear and then take rational steps to analyze what’s really causing the problems and then move forward. That’s really what it’s all about in business, growth and all of these things.
You don’t have to do it haphazardly. You come up with a plan and you try and stick to the plan. You follow the plan. Life very seldom goes according to plan and so we’re constantly reassessing, revising and continuing to grow and build. But again, it goes back to the value creation mind-set. The successful person doesn’t just wallow in misery and look at the problems and say oh, there’s a bunch of problems and waah, waah, waah. The successful person says, how can I make this better? It goes back to that entrepreneurial mind-set right from the beginning. It’s easy for us to slip back into the non-entrepreneurial mind-set and want to wallow in our problems and fears and self-doubt. But it’s a conscious decision to flip the switch and push ourselves to be ruthless in that self-assessment and take action. That’s the way forward.
Craig: Yeah, that kind of really brings us back to the start. Barring catastrophic injury and not losing your mental reasoning, if you did lose it all by losing your finances and stuff, you would never lose it all because you still have, if you’ve done this right, your connections, your network and you have the skills that you’ve built and that brings us back to what the camp is really all about, which are those two things. So is here anything you want to add about encouraging people who are listening for the first time to apply this year?
Simon: I’m not going to say anything else. I don’t want to sound like I’m selling it because I’m not. The reality is, by the way, it’s free. We don’t charge anything for it. I don’t know how many opportunities people get in their lives to be able to sort of come together with like-minded folks, people that are just incredible winners who want to go out there and actually do meaningful things that have an impact and actually count, and be mentored by a bunch of people that have a ton of experience and have achieved a lot of success, and be able to do it in a beautiful countryside setting at a place that you’ve probably never been to or never had an excuse to go to in your entire life.
Craig: And you’re missing out if you don’t.
Simon: Yeah, it’s a great place. There are not a whole lot of opportunities that you get like that in your life and, by the way, not have to pay for it. I’m not going to say anything else about it. I don’t think I really need to. If I have to sell it then you shouldn’t apply. If you don’t see the opportunity then please don’t apply. That’s all I can really say.
Craig: Right, and for all those people listening that have kids in college or 30-year old friends who are ambitious people who sound like they would be connected to this mind-set, by all means do send them to BlacksmithCamp.com or SovereignAcademy.org. They can watch the videos we’ve made for everybody there. They can find out the details about the camp, the dates, and all that good stuff. It really is a fantastic opportunity. That’s why we wanted to do this interview. Is there anything else you wanted to add that we didn’t cover?
Simon: The one thing I didn’t mention, I just briefly used the word “apply” but yeah, we receive countless applications. I have no life for the next couple of months as I personally review every one of the applications. The video applications, I go through all of them myself. It’s a lot of work but it’s important and I like to do it. And we only have 50ish slots available so the selection rate is extremely competitive. Just like life itself, business itself can be extremely competitive. So I do want to mention that it’s not like anybody who wants to go can go. It’s tough to get in but I would imagine that hopefully people listening to this have enough confidence in themselves that the fact that there’s competition won’t cause you to not apply.
Craig: Wonderful. Well, thank you so much for your time, sir.
Simon: All right, buddy. I appreciate it. We’ll get onto the next video now.
Craig: Yes! All right. Thank you, everybody. This is Craig Ballantyne and Simon Black from BlacksmithCamp.com. Bye-bye.