I have been reading other personal finance blogs which mostly follow the kind of logic from “The Millionaire Next Door”.  The themes are mostly about cutting expenses, living well within your means, investing wisely and making smart decisions about large ticket items.  Some of them explicitly state “Get Rich Slowly” as their motto.  I understand that this message applies to the widest possible audience as most people are working in jobs for a salary and this type of theme then applies.  However, as I look out at the most successful people in my network, they didn’t gain massive net worth by this method.  Instead they, generally speaking, have careers that are tied to a lot of “Deals”.

What is a Deal?

What do I mean by “Deals”?  I’m taking a pretty broad perspective on it, but in general you know you are involved in a deal when you :

1)     Speak with lawyers and sign your name on some documents

2)     See large dollar numbers changing hands

Loss Aversion

Most people are scared to death of deals.  It’s a known psychological issue with humans that we treat the potential downside of an arrangement with much more weight than we do the potential upside.  There’s even a name for it… “loss aversion”.  Humans tend to hate losing things we have much more than we enjoy gaining things we don’t have.  Understanding this phenomenon and trying to use the power of your intellect to overcome this loss aversion is one key (in my opinion) to begin taking on more educated risks.

My Story Overcoming Loss Aversion

I think back to my own experience starting my company.  I got my first corporate job in 2009 when jobs were very tough to come by.  I was making a salary for the first time in my life and it seemed like a lot of money.  Especially in view of the fact that my wife was also making a good salary.

$52,000 / year + $95,000/year = $147,000 / year.

For two young adults in their mid-20’s we were feeling pretty good about things.  We had no kids and our disposable income was great.  We travelled internationally and went out whenever we wanted.  Life was actually really great.  My wife didn’t want to see that go away, and she and her family were quite vocal that I should keep that job.

Why Quit My Job?

When I got my first raise after a year on the job to a whopping $58,000/year I realized that my potential upside here was going to take quite some time.  I also realized that the amount of money I was being paid, in the grand scheme of things, was not very much money at all.  I told my business partner this :

“Think about it, if we start our own company and I can average anything over $60,000 / year I will be better off than I am here and now.  I also will learn so much more than I am learning now which I could further leverage in the future.  With this benchmark, we have a very short hurdle to jump over for success in this venture, and I think it’s quite possible we accomplish this. If not, we will be more employable and could get MBA’s or something and do a reset.”

I’ve always said if you are going to go bankrupt, try to do it before you are 30.

Of course it turns out I was completely right, and even with our modest success in this venture I will average over $500,000 / year for these 8.5 years of work.  A HUGE improvement over what I could have done any other way.

Let’s take the counter argument and suppose I would have failed in this venture.  If we folded the company today, my total investment in lost salary to-date would be only :

~$150,000

I am quite certain with having run a team, met lots of very rich/powerful people, built a product, raised venture money etc. I could get hired even after failing for about :

$200,000k/year

So my return on the startup would still have been positive through better career opportunities, in my opinion.  I would have considered it like an MBA equivalent, and possibly would have done a real Executive MBA while working later (now not necessary).  It’s hard to prove a counter-factual or go back and see “what would have been” but I just didn’t see much downside to quitting that job.  I still stand by that of course.

“There’s a tremendous bias against taking risks. Everyone is trying to optimize their ass-covering.”

-Elon Musk

Back to Deals

What are some categories where we see deals going down that we may be able to get involved in?

1)     Real Estate

2)     Start-Ups

3)     Content Creation

4)     Commercial Contracts

5)     Service Providers to Deals

1)     Real Estate : The crazy GOP hopeful, Trump, definitely hasn’t made as much as he claims, but he has made a bundle in the real estate game.  Many, many others have gotten involved in real estate and done quite well.  I call it “America’s white-collar second job” because so many people are involved.  My wife and I bought a home in need of work back in 2009 and completely paid off all our student loans by selling it four years later.  When we were holding a check for $160,000 in our hands, it felt really good!  It also underscored my previous point about how little money I was making for my time in my first job.

2)     Start-Ups : As an entrepreneur you are at the epicenter of many deals.  Deals with your co-founders, deals with employees, deals with investors, deals with customers.  If you like negotiating, welcome home.  Even if you don’t start something, you can look to invest.  The Jobs Act has passed and you can consider getting involved in start-up investing with small amounts of money now.  I will elaborate in a future post.

3)     Content : This one is tougher if you aren’t a creative type or in a content town (like LA for example), but content can make money.  Youtube channels, new bands, indy movies etc. are being funded all the time and you can either become a content creator or fund others who are.  Do your homework and play at your own risk.

4)     Commercial contracts :  Contracts for services, software or product delivery can all be very lucrative.  Business development professionals run these deals for companies and can be the highest paid people at an organization.  I’m aware of a guy who made $5M in one year selling enterprise software due to an insane commission structure.  He was completing a lot of deals obviously.

5)     Service Providers around deals : M&A advisors, Attorney’s, Lawsuits, Accountants its goes on and on.  When there is a big deal going down you better believe there is a lot of money being handed out.  If you are in professional services anyway consider moving closer to the largest deals in your area of expertise and you will see your income moving north quickly.

A caveat here… Getting involved in deals has high returns for reason, it is higher risk.  I’m not suggesting to do deals just for the sake of doing deals, but I am suggesting think about your skills and abilities and consider ways you can get involved in more transactions where you have solid education and confidence that you understand what’s going on.  Always seek to understand a deal at the deepest and lowest level possible.  I have a friend who once called me about a real estate deal he was involved with.  It became clear after my 5-6 questions he had no idea what he was doing and was blindly trusting a third party. I ran for my life.  People were later indicted around what was happening (essentially mortgage fraud and he was the sucker).  Be SMART, and ask questions.  You can’t nod and smile your way to a good deal.

What are your thoughts on my deals theory?  Are you involved in a lot of “deals”?  If not, why not?