I don't know about you, but I like to actually make money. Remember you don’t want to just own a business, you want that business to cashflow. This week we discuss how not to confuse the two.
BUT FIRST
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Our Black Friday Deal won’t be cheaper, or better than this offer, so if you’re ready to create your first $10,000+ in passive income (like Nick did buying his first business), now is the time. Eeekkk makes me tingle reading it.
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Today in 10 minutes or less, you’ll get:
A framework to hold close during tough times
3 businesses you should never invest in (or at least I wouldn’t)
The world is getting hairy, but picking up talent might be easier than you think
MENTAL MODEL
We’re All Renters
It is all rented.
This life isn’t a given. Nothing is. We’re just a world of renters on borrowed time, redecorating like we own the place. We spin our wheels trying to play for keeps, but life’s just a fish you gotta throwback. It keeps swimming and we… we don’t.
That’s the thing about living. It’s real close to dying. All the time. There’s no denying it.
But man do we like to deny, deny, deny. We struggle for control... playing stupid games to win stupid prizes. Ain’t that funny. Life has a sense of humor. Its lips curl up thinking, “How quaint you humans and your 10-year plans.”
There’s no getting out alive. So you better make sure you live. For when you’re old, and the world has become small, and your body constrained, all you have is memories. At least for a while, before those pass away like leaves in the wind.
May one of your many graves be in the heads of those around you.
*I found this above snippet I had written to myself in 2015. I was 29 years old and worried about the impact I’d have on the world. It felt like maybe I wouldn’t have much of one. For some reason, this helped. The idea that at the end of the day, no one will remember your name. Could that be sad? Maybe. But it’s also freedom. Every bully, every mistake, will pass like a grain of sand.
So, I suppose, live while you can.
Even though we strive for ownership. Never cling too tightly to that which you can’t take with you.
THE ANTI-INVESTMENTS
Businesses That Will Never Get My Money
I can’t wait for all the responses we are going to get on this bad boy.
“YOU DON’T UNDERSTAND… MY X BUSINESS IS BETTER.”
Ok, ok, I’m sure within this list there are gems too. But when investing, I’m obsessed with one thing: probabilities. What is the likelihood that my money leaving my hands comes back with more money as friends? That is the only game we play. So let’s talk about some sh*t businesses, shall we?
#1 ATM Routes
Ya’ll know we love vending machines. We even showcased Quinn’s 6-step process for getting started!
BUT - not all “vending” machines are created equal. Far from it. ATMs being one of them.
Why would I never invest in ATMs?
Let’s count the ways.
Margins
The margins are incredibly small. I mean very very small. I mean not even 6 inches on average. We’re talking 1-3%. You can usually keep the majority of the surcharge percentage for a machine, but that’s still not enough. Let me tell you why. A surcharge is when you charge someone $3.00 for using your ATM. You get 100% of that. However, most ATMs do 3-6 transactions per day, so that’s about $540 a month if we assume you do 6 transactions every single day. The average withdrawal at an ATM is $80-100. Add that math up and you don’t even have enough to pay someone to run your routes.
Payback Period
The average payback period on ATMs is long. I’ve looked at multiple funds in the space that don’t start paying you until after 4 years. Individual ATMs won’t hit breakeven usually until after 7 in reality. That is because the average revenue per machine per year is around $1,500-$5,000 (REV - not profit).
Future of Cash
Here’s a squishy one. Will cash continue to be important in the next few decades? Maybe not at the rate this fed is printing dollars. It’s an open question. If the overall use of cash decreases, you are at a big risk since there is no asset/collateral to sell.
So ya, unless you’re giving me a spot in a cannabis store where they don’t take credit cards or in front of a massive grouping of bars that never have enough card swipes and charge a cash cover, I’m out.
#2 Amazon FBA
Is it just me or does every kind of scammy Instagrammer have a, “Hey girl, lemme set up your Amazon FBA store for you for like a quick $5-$20k?” What is it with that?
Anyway, Amazon FBA is when you let Amazon pick, pack, and ship your orders. You sell it, they ship it. You store your products in Amazon's fulfillment centers, and they pick, pack, ship, and provide customer service for these products. You leverage their massive scale and logistics, which is not a terrible idea. But let me tell you why I’d never do this business.
Platform risk
Amazon controls everything. The biggest feature is the biggest bug. What happens when Amazon decides your product is a scam because a competitor puts up a bunch of fake reviews? That happens. They’re notorious for that. I know a seller that was doing $1.5M in sales, had his account banned for fake negative reviews, and couldn’t get it back for 90 days by which point he’d gone out of business. Or Amazon actually gets all your data on how incredible your niche is and duplicates your product with a cheaper version of their own. No thanks.
Me-too products
The barriers to entry to this game are lower than FTX’s actual balance sheet assets. Competition is everywhere. Thanks to all those internet gurus slanging Amazon courses pushing private label selling, Amazon is already flooded with me-too sellers.
Then, of course, we have the Chinese. Am I allowed to say that? Chinese sellers outnumber US sellers on Amazon.com. Their speed at copycatting products is almost as impressive as their lack of interest in two words: “intellectual property.”
Amazon sets your price
They use an army of bots who scrape other websites for pricing information. If they see your products as too high, they may shadow ban your account which is a sales killer. So if you want to sell higher on your own website or elsewhere, it’s a no.
Even if you sell your own branded products on Amazon, it doesn’t mean that you get to set your own prices.
Amazon info on the black market
This is wild. Amazon has had issues with employees selling companies’ data in other countries. This is basically the cheat sheet for low-cost copycats to come in and recreate your business. Below is a real sheet off the black market.
#3 Retail Stores
It’s every lady's dream to start a little boutique with all their favorite things, have friends come in, and sell as many “live, laugh, love” graphic tees as your little heart desires. And it’s not just ladies. Many a gent wants to own that store with a bourbon bar and clothes that are actually “cool man”. The problem? Those are 9 times out of 10 terrible businesses.
Scars aren’t healed
I walked into a shopping mall on the outskirts of San Diego. Despite the flashing lights and sale signs, I can’t help but notice the scars found on just about every mall I’ve been in. The flagship store, formerly a 200,000-square-foot Dillard’s, is empty and dark. The future in retail may continue to be online, except in high-traffic “experience” based areas.
You buy product upfront (no float)
When you go to buy the retail supplies to sell in your store, you pay upfront. They then need to ship those items to you which you need to stock and likely hold for a period. Leftover inventory? Too bad. Order new fall styles in summer even though you can’t sell them for 60-90 days. Oh well.
High rent for high traffic
The cash flow realities of a high overhead retail business model like specialty retail are not to be understated. Mont won’t ever tell you how much they really make. A lot of these mom-and-pop stores are funded by people with big pockets as a defective side project, or to bolster a brand's online e-commerce business. You live and die by sales per square foot, but in order to get enough volume, you have to pay rent that’s equivalent.
Tough Financials:
The high turnover of inventory necessary to keep customers coming back gives me more issues than I’m willing to deal with. What do I stock? When? How do I insure my lower-pay employees aren’t stealing? How come no one will give me a loan to start this business? Those are all fair questions. Your largest problem won’t be your gross margin, aka what % you make on each item you buy and then sell. It’ll be your net profit. Getting enough volume to handle your fixed costs.
Buy local, but stick to the products, not the business.
Bonus Businesses I Also Love to Hate:
Restaurants: Spoilage, failure rate, the fickleness of customers, staffing
Gyms: The bigger you get the worse the customer experience, hard to scale
Dry cleaners: Toxic issues, hard to staff, remediation can kill your business
Am I missing any? Did I call your baby ugly? Sorry. Kinda.
Question everything and protect your pennies,
Codie & Contrarian Team
Written by Codie Sanchez, Edited by Rananda Rich and the Contrarian Crew
CONTRARIAN EXTRAS
Layoffs Not Looking Pretty
The world is looking hairy. We’ve been talking about the oncoming recession for some time, including the biz I’d do in a recession and how to weather the storm. Just a reminder, there is always opportunity in every market. For instance, we’ve seen 120,000 layoffs in the tech industry in 2022 so far, about 1% of the total employee base of 12 million. That’s a tragedy, but it’s also an opportunity to hire those 120,000 talented humans. I sure am.
Disclaimer – This is the “Be an adult” section. Everything mentioned above isn’t advice, just a recount of what I did. That said: This article is presented for informational purposes only. The opinions stated here are not intended to recommend any investment or provide tax advice. Neither are they an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Codie Ventures, LLC or its affiliates. All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading and investing do involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk. You are solely responsible for making your own investment decisions. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. By reading/sharing this newsletter or consuming our content on our other channels, you are indicating your consent and agreement to our disclaimer.
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