Special Research Report: Six proven strategies to survive the recession as an entrepreneur
Posted March 24, 2008
"The secret to being a successful entrepreneur, first and foremost, is to figure out how to sell your product. Focus on that. Spend 80 percent of your time on that, 20 percent of time on all the other things, and you’ll be successful." — Michael Masterson
The following is based on Michael Masterson’s exclusive Internet video interview with J. Christoph Amberger.
by J. Christoph Amberger
Baltimore — (TFN): J. Christoph Amberger: The American economy may or may not enter a recession in 2008. But no matter if U.S. GDP fulfills the technical criteria of two consecutive quarters of negative growth or not, anyone doing business or working for a business these days is experiencing or expecting a severe downturn.
Small-business expert and entrepreneurial guru Michael Masterson, author of the bestselling Ready, Fire, Aim, however, looks at recessions as opportunities for business owners and entrepreneurs.
Michael, we have been through one other recession and bear market in the last 20 years. What are the secrets of surviving a recession as a businessman, and how can you actually leverage a recession to prosper in them in an adversary environment?
Michael Masterson: First, it’s good to know what kind of economic situation you’re in. It’s hard to say what’s going on right now. Certainly you’ve got some very significant weaknesses in the economy. The dollar is collapsing. You have an enormous amount of debt, both in the federal level and a personal level — like we’ve never had before.
But what makes this different from at least recent dips in the market is inflation. We’ve got gold right now that’s approaching $1,000. Oil is at $100 a barrel. Gasoline’s $4.00 in some states. That makes it an especially difficult period for a lot of people. It’s going to put them in a situation of having less buying power. Wages aren’t going to be increasing. Some even say that we’re going to go into a period of stagflation.
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These are considerations that are going to be affecting people and both employed people and small-business people. Surviving to me is a matter of focusing on the fundamentals. When you’re in a bad environment, there are some rules that prevail.
Survival Strategy 1: "Cash is king"
First of all, cash is king. This is very important.
I started talking about real estate a few years ago. The real estate debacle, as they call it, was really no surprise. It was obvious that things were getting out of balance. I stopped investing in real estate about two years ago and started holding onto some cash.
That’s what a lot of businesses did, sophisticated financial institutions and some small entrepreneurs like me who just realized that times were going to get worse. If you have cash, it’s a good thing to have, and I wouldn’t start spending the cash just yet.
Survival Strategy 2: Buy Value
Another principle is that you want to buy value.
In the past two or three years, a lot of the investments — either real estate investments or associated real estate investments — were way overvalued. People were chasing prices and it was impossible to make those things work economically. The only chance you had of making one of those investments work out was if somebody else was willing to pay even more than you paid: the greater fool theory.
That eventually comes to an end. But you want to continue to buy value. If you have cash you want to invest it in businesses and/or investments that are fundamentally sound.
Survival Strategy 3: Buy into the Recovery
The third thing you want to do is buy into the recovery itself.
You want to identify what the sectors are that might be prone to expansion and growth. It’s not every part of our economy that’s deflating right now. There are growth opportunities, and I think if you identify what those are, you have a good chance of not just surviving but of profiting.
JCA: These sectors that may be less effected in a recession than others… let’s talk about this for a moment: We’re looking at potentially expanding unemployment, and unemployment means a lot of people who may have considered going into business for themselves suddenly find themselves, by necessity, going into business.
Where do you see those sectors of opportunity? Is there a particular part of the economy where you would recommend looking into?
MM: It’s not just people who become unemployed who should be looking towards entrepreneurial activities. Everyone with a job in no-growth industry sectors should. If you’re in an industry that’s not growing and not likely to grow, and you have a job in that industry, it’s highly likely that your wages will not increase substantially.
And in a stagflation environment that means you’re going down.
Survival Strategy 4: Create a Small Business
But the one resource that our economy always has, that America has always been very good at, is small business, the creation of small business. We have a relatively free regulatory environment in terms of starting a business, and this is going to be the eventual solution to our economic problems.
More jobs are created by small businesses than by large businesses. Most people don’t know that. They think these large corporations are employing most of the people, but the new jobs are created by small businesses — small business people that start barber shops and start lawn services and start internet operations.
In view of sectors, there’s obviously going to be some that are affected negatively and positively by the current situation.
Survival Strategy 5: Real estate is a good long-term investment
Real estate and all businesses that are associated with real estate are going to suffer in the next year or two until things hit bottom. We have too much inventory right now. It has to be used up, and then real estate will recover. Between now and 2025, there are 60 million units that need to be built in American – 60 million new housing units. Immigration and population growth-rates add the equivalent of the entire population of Chicago to the United States population every year.
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There’s a lot of old structures that need to be replaced. That’s going to be a big factor. Real estate is a good, long-term investment. In the next two or three years, it’s going to get worse before it gets better… and then it’s going to stagnate for a while.
When it hits bottom, and this may happen in six months, the big vulture funds are going to come in. They’re going to buy up all the big condominiums, the big office buildings, and they’re going to sit on them because they have the money to sit on them until the absorption levels are such that prices start coming back.
We just saw that happen in Europe actually over the last two years.
JCA: If you’re following the presidential election, you hear a lot of raising taxes, making healthcare contributions mandatory for businesses, raising labor costs. In a global environment, is America all that it’s cracked up to be? Should an entrepreneur really hitch his fortune to the United States in this potential political environment, or is it better to look at countries with a little less drag on private initiatives such as Russia or China or the Cayman Islands?
MM: It depends on what kind of perspective you’re taking, whether you’re an investor or whether you’re an entrepreneur. I’ve been doing global investing as an entrepreneur for more than ten years now, and I’ve learned a lot about investing overseas. There are pluses and minuses to investing overseas.
Generally speaking, the sectors that – and I’m speaking as an entrepreneur – the business sectors that make sense to export are those whose cost depend heavily on labor, producing shirts or growing pineapples or something like that. But most of the industries that America is very good at are the labor cost, the actual brute labor – the labor cost of the – unskilled labor cost, let’s say, is relatively small. So for those industries, I think you can still perform them fairly well in America.
America does have some big advantages. One of the major advantages that you don’t get when you’re overseas – I have businesses in third-world countries – you can’t get good, skilled labor. It’s very difficult. And if you do get good, skilled labor, it often costs nearly as much as it cost in the United States.
So I still think there is an opportunity. As an investor, certainly, I’m so very excited about opportunities in overseas and China and India. Those economies are amazing, and there’s still a lot of opportunity. But in terms of sectors, I would say as a businessman in America I would still be focusing – and not just in America – but I would be focusing on two things.
Survival Strategy 6: Focus on the Right Sectors
*** Resources and commodities
The sectors that are likely to profit from the current recession and rebounding as the recession evolves into a healthier economy. Obviously, in the short run, natural resources, oil, gas, agriculture will be strong for some time. How long I don’t know.
If you’re involved in those industries you’re going to benefit. Those industries are hiring people; they’re expanding; they’re spending more money on advertising. There’s a lot of opportunity there.
In the next phase, over the longer term, I think there’s a more dominant trend that will be affecting our economy, and it will be affecting economy regardless of what happens with the specific economics of a recession or stagflation.
*** Demographic trends
And that is the generational phenomenon of the baby boomers. The baby boomers have always been the dominant force in our culture and our consumer culture, and that’s really what I’m investing in.
And there are a whole number of sectors that are going to profit from this last shift in our lives as baby boomers move from being in the workforce fully, to moving into a situation where they’re moving out of the workforce in part. I don’t think they’re going to move out entirely. The industries that I would be looking at are all relating to retirement, including living overseas, or products and services that relate to retirement.
All products and services that relate to health and well-being that affects older people. In other words, I wouldn’t be investing in rigorous exercise program products anymore. I would be investing in yoga and Pilates and easy forms of exercise because that’s what we’re going to be doing.
I think there’s a big booming industry in something I call spiritual wealth. There’s going to be a shift in our culture because baby boomers, by and large, are not going to be able to become materially wealthy, as wealthy as they wanted to. And we are, remember, the original hippies, so we’re going to realize this at some point in time. There’s going to be a move back to the concept of how can we live a good life. If we’re not going to be materially wealthy how can we make use of what we have.
*** Internet Boom II
There’s a third trend that I think is worth investing in and that’s the internet. The internet is not transforming the world the way it was predicted in the late ’90s — but it is transforming the world. And it’s creating enormous opportunity. There’s enormous growth there.
I am personally in it looking at all the industries that are related to this growth in the internet, particularly direct marketing industries and information publishing. The keys to being successful in this next period is being in a business that doesn’t have debt, that is cash flow positive, that doesn’t have accounts receivable and that doesn’t have inventory.
Well, that business is the information business, and the information business is huge. I don’t just mean publishing. I mean any kind of advisory services, any kind of entertainment services. What you’re doing right now is part of the information business. It’s a big business, and America is the king of the information business.
So this is great opportunity for entrepreneurs of every shape and size to become wealthy and to enjoy the rebound that’s eventually going to take place by being on this side.
Because the internet, again, has a very low threshold in terms of the cost of getting into the business. So I think from every point of view that’s certainly what I’m doing, and it’s what I advise people that talk to me about surviving the next period to do.
JCA: But survival also requires you avoid mistakes. What do you think the three largest mistakes are that an entrepreneur or a business owner can do right now?
MM: I’ve just made a big issue about that in my latest book which is called Ready, Fire, Aim. And that title suggests that the big mistake that most entrepreneurs make is over-planning.
They have an idea for a business. They research it. They plan it. They counter-plan it. And they just keep waiting and waiting and waiting, and they never get to the starting gate. I think it’s really important that you don’t belabor the business. You’ve got to be ready, but you have to start your business.
I would say the biggest mistakes they make are not seizing the opportunity when it’s there, which is Ready, Fire, Aim.
Two, starting a business that you don’t know enough about. You need to know what you’re doing.
And then three, I would say is, when you start the business, focusing on secondary and tertiary projects instead of the most important thing in any business, which is selling.
A lot of entrepreneurs go shopping for an office. They’re buying stationary. They’re doing business cards. They’re setting up websites. But they haven’t really figured out how to solve the problem.
The secret to being a successful entrepreneur, first and foremost, is to figure out how to sell your product. Focus on that. Spend 80 percent of your time on that, 20 percent of time on all the other things, and you’ll be successful.
JCA: Very wise words, Mr. Masterson. We have provided convenient links to Michael’s most recent bestseller, Ready, Fire, Aim.
*** IN CASE YOU MISSED IT: Watch TFN’s Krista Das interview Michael Masterson about his real estate investing strategies!
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