Could James Altucher be wrong?

I admit – James makes me laugh. He rocks in his writing and love the fact that if you shoot him an email, he may get back to you “eventually”. I consider him one of my favorite connections (I have many favorite connections so don’t feel bad if I don’t call you out). I think though on a recent posting that James is wrong in his thoughts. James recently posted / repost (can’t tell but see comments from 9 months ago) an article on Entrepreneurship. Being an entrepreneur is difficult and risky. However, I completely disagree with his assertion you cannot control the risk. You can because it’s what I do for my business. I use risk mitigation to manage this.

Loss Controls

The one factor I use in risk management is cash. Everything I do is either on a credit card or paid for with money out of my bank account. When looking for advice, I have heard the gambit. In fact, when I went to launch my business I had over $250,000 in commitments from people looking to partner with me for capital being raised. In doing this, I didn’t even approach my ‘whales’ and figure I could have conceivably raised over $1 Million in starting capital. In the end, I chose a $1,000 investment from a family member. You might be scratching your head why.

$250,000 is more than my house (barely). The problem with this size of investment is I need large returns to make it worthwhile. This would require truckload containers of products. Now I can purchase in bulk and have it shipped in or perform a consolidation. If I consolidated, I’d need to hire a service to do this for me for a fee – assume $1,000. When it arrives, my HOA would kill me having a cargo unit dumped in the road in front of my house, so I would then need a shortage facility. Around my house, I know a place I could do it for $250 / month with power. If I wanted secured facilities, we are looking at $500 to $750 / month. Freight would cost me $2,500 all in and maybe $250 in duties and taxes. So excluding the cost of the items, in a single month I have an overhead and sunk costs of $4,000 to $5,000 and I haven’t sold a single item.

Instead, I purchase in bulk, but do it in smaller quantities. On AliExpress and Alibaba, $1,000 can get you a significant amount of items if you know what you are looking for. I added in another $1,500 on my own cash so I have $2,500 to ‘play’ with in items being purchases. My tradeoff is time – it sometimes takes a while for the goods to arrive to me (weeks instead of days). I opted not to get a loan because that has interest. Assuming a $10,000 Line of credit, at 12% APR I am looking at about a 1% carrying cost or $100. $100 isn’t much in the grand scheme, but it’s still overhead. While my house, computer, and supplies do cost money my effective overhead is $0. Any gross profit is effectively my net profit.

Reason this matters is let’s say my primary job I get busy or my wife and family need my attention. I can just place everything off to the side and only concern I have is my money is tied up in the product. On the other hand if I did that with an outside facility, I would be running a cost of probably $1,000 a month. Furthermore, investors tend to me less understanding about “My son had an event to attend” when I don’t work over a weekend. I could solve this by hiring a helper – but that again costs money and raises overhead. So all said and done, I have items to sell. Now what happens if it fails to sell?

If I had $250,000 in merchandise I am effectively hosed. I could liquidate the assets to the point that someone would purchase them, but my purpose is to make money and not lose it. If I have only $1,000, it is significantly different. Instead of liquidating items – I have my holiday gift giving covered. Since I deal in fashion jewelry, I weigh my purchases against my wife so in part anything purchased she would like. Compound this with recovery – I can recover in a month or two on a $1,000 loss. In the case of $250,000 you can bet at least someone will be filing a lawsuit against me for gross negligence and mismanagement.

Turnkey Solutions

One thing I do have is a great network of resellers. I will generally ask my family and friends who is interested in some item I purchase or are there any items of interest they are looking for. Reason I do this is simple – market research (what is popular and in demand at the moment) and to hedge my bets on my target sales group. Again – I am mitigating my risk by buying and selling items where I can least make a return against.

For the resellers, most like to hold either garage sale, sell at flea markets and community events, or even have their own store front. Since they are concerned with their retail presence, some enjoy the fact I have items for sale. In a sense they are my outlet as I act as a distributor. In most cases, it’s a tradeoff of hold and go B2C or quick turnaround for B2B. I opt for B2B simply because it gets the product off my hands. For sake of assumption let’s say I got $200 worth of merchandise. A contact calls and asks what I have and they are interested. I normally add on like $50 or so and sell it to them. Besides for a profit margin of 25%, I sold my items in bulk in a single transaction. Sure they may sell it for $750 to $1,000, but for me I had no risk.

Way to stop risk here is have a customer before you purchase. This has more to do with your ability to negotiate with others than picking the right product. In most cases, I don’t venture into items I wouldn't use or can’t pawn off. In fact, a major factor is ‘comping’ my merchandise. ‘Comping’ is where I compare my items to the same or similar items online. I see the price they are selling for and determine if I can purchase and sell for that rate. Without revealing my strategy for this, it basically is can I garner interest and move the product. If no I pass, if yes I purchase.

Focus here is to always look for an option to best handle your problem. By being proactive, you eliminate unnecessary risks. Combined with careful planning, you can even capitalize on your ability to perform where it could be conceivable you never have to touch the product if savvy enough – have your ‘customer’ place the order which in turn is ordered then shipped direct to them. Your cut of the profits is taken right at the start.

Define your business’s true purpose (not what you hope it will be)

I never went into doing my side business to get rich. In fact, at the rates I sell, it will be a long time before I’d be even remotely rich. What I did do however is turn my side gig into a laboratory. For me it’s more about trying new ideas and learning than making money. Granted I set it up where It is hard not to make a profit off my sales, but to me this is more a fringe benefit than the purpose.

Reason I started the business was twofold. First reason was to earn enough money to cover my student loans. Consider it like having my education earn me a return on investment. Ultimately I would like to make enough to effectively pay off my student loans. However, at this time it’s more to subsidize my payments. The second reason was to learn things I couldn’t at work. Initially it was to gain international exposure to business. Only way to do that in my company is be in purchasing as a buyer. Since I am an analyst, this probably isn’t a route for my career. However, importing items for resell is. I have learned a lot about business functions needed to perform this task since I started. However, what I learned even more was the complexity we generate in international commerce simply over cultural differences.

In terms of cultural differences, I’d like to talk about US-Chinese opportunities. Much of how we do business with each other is nearly foreign in concept and understanding. About 90% of the Chinese companies I deal with in planning items to sell think “If I price it cheap enough, Americans will buy it”. In fact for me is the value proposition – what is the least price I can get for an item that is high quality and a value for my end customers. Most Chinese firms fail to grasp this in my experience. I am not interested in pay $.10 per unit for an item that is trash, when if I spend $.50 per unit I can get something that will last for a significant amount of time. In the end, if I am selling it for $5.00 per unit, does it matter over the few cents on my end? The other factor is communication. I lay out what I think are pretty specific requirements for a RFQ. About 95% of my responses are items I have no intention of ever purchasing.

In fact, my latest foray into learning has been contract manufacturing. I am looking for a company to purchase an item in small batch quantities that meets a particular set of requirements. I will either have someone state they are interested, but ‘small batch’ means a commitment to 4 cargo units full of product or I will find someone willing to sell me a pallet of product but nothing like I asked for. That was till I found a company in the Middle East willing to do it. They were dislocated due to the conflict in Syria and want to make whatever items they can for me just to keep their employees occupied during the exodus. While still working out the fundamentals and contractual obligations, it looks like it’ll be a go shortly on this regard.

So there lies my reasons why I think James is wrong. It’s possible to substantially reduce risk to the point you could effectively be operating at a risk free basis. In fact, my largest risk at the moment is I simply I don’t do anything with my company. However, with proper planning, success can be greatly enhanced with proper scaling to meet your risk needs.

James Altucher's article referenced can be found at this link:  https://www.dhirubhai.net/pulse/dont-say-you-entrepreneur-james-altucher

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