Chapter 15

The Rich Person's Mind-set

Art Linkletter is one of my most treasured friends. He is undoubtedly the best investor in start-ups in the world, and he is one of Hollywood's richest men. Once when he was on a cruise with us, he told me something that has changed my life.

“Howard,” he said, “I have invested in a lot of deals. Some worked out, and some didn't. When we had a good one and we got together with other investors to get our payoff, we toasted each other and congratulated ourselves for being so smart. To tell the truth, I can't even remember what most of them were. For sure, I never learned anything.

“But if the deal failed, we would get together for as much as two weeks for a postmortem and try to find out why it didn't work out for us. Sometimes it was the entrepreneur we were betting on who failed. Sometimes it was just bad luck. Sometimes it was an idea whose time had not yet come. Sometimes it was poorly executed or a bad idea. But as we dissected the corpse, we learned and learned.

“Howard, I never learned a thing from a success. Everything I know I learned from my failures.”

RICH PEOPLE'S MIND-SETS #1 AND #2

Don't Be Afraid to Fail, and, if You Do, Treat It as a Learning Experience

I'm not talking about the stupid, common mistakes with money discussed in Book I, such as letting compound interest eat your income. I'm talking about errors in judgment when taking carefully calculated risks, an entirely different matter. In our society, we penalize people for their mistakes, starting in the first grade. Our wrong answers were not treated as learning experiences, but as reasons to give out bad grades, and we were punished for them. Business is different; mistakes and failures are your best teachers, and real entrepreneurs aren't afraid to venture, because they know a temporary failure—even a spectacular one—is a chance to learn something they would never have known otherwise. Every Really Rich person I know has left a trail of failures behind him or her before he or she made it big.

I think the best classroom for me was my two years spent as a Mormon missionary. It was there I learned to live with rejection. It was truly the school of hard knocks on tens of thousands of doors. Day after day we had to endure dozens of rejections, sometimes with courtesy, but often with hostility and profanity. I even had a German Shepherd sicced on me. The acceptances were infrequent, but all the sweeter for the rejections we had experienced, even next door. Two years, tens of thousands of doors, and only 25 convert baptisms, representing only eight families! So what kept me going into the teeth of rejection? The money? No, my mother sent me $50 a month to live on. It was passion, the unshakable conviction that their lives would be enriched if they allowed me to share with them what I knew.

This same kind of passion drives all business pioneers onward into the teeth of skepticism, rejection, and failures. Without it, they would probably quit just short of the promised land of success when things got tough or even hopeless—and most every rich man I know had a time when all seemed hopeless, his back was to the wall, and the wolves were circling. Without that passion, sooner or later, he was dead meat. And even if that project failed, he was ready to attack another one with even more passion.

I remember the day when my speed-reading school franchise was canceled. I had gone to work rich and I came home broke. I told Kay, “I've just had a bad day; Tomorrow will be better.” And if you will allow me a rather loose definition of “tomorrow,” it actually took me two years until I was clearly on the comeback trail.

Resilience is a part of the rich people's makeup. When they fail, they mourn what could have been for a day or two, then they bounce back, armed with undented confidence and new lessons learned.

RICH PEOPLE'S MIND-SET #3

You Can't Leap a Deep 10-Foot Ditch in 1-Foot Jumps

Business success requires grand efforts. Successful businessmen have dared greatly, unlike the “timid souls” Teddy Roosevelt told us about, “who know neither victory nor defeat.”

RICH PEOPLE'S MIND-SET #4

They Pride Themselves on Providing Good Jobs for Good People

When the rich hire people who are willing to work very hard to make them rich, they reward those people well when success arrives on the doorstep. It would be a difficult world for me if everyone bought the rich people's mind-set, as where would I get the worker bees I have to have to make things work? Only a few of the people who read this book will be clear enough on the concept and determined enough to apply these principles to make themselves rich, instead of their employer. But if one of them does catch the spirit of the rich people's mind-set, you might want to consider investing some of your money in his or her start-up, as described in Chapter 18.

RICH PEOPLE'S MIND-SET #5

They Are Willing to Endure Deprivation along the Road to Riches

The rich don't take a big salary at the cost of business success. I remember when I was trying to build The Ruff Times in the early years, and in order to succeed we had to pour every penny back into marketing, even when we were behind on the family bills. When Kay would ask me when we would have the money to pay the back bills, I would tell her that if we would take care of the business, eventually the business would take care of us, and that's exactly what happened. Because the rich believe passionately in their future, they are rich even before they get rich.

RICH PEOPLE'S MIND-SET #6

They Are by Nature and Inclination Futurists

These people are not building a business for today, but for tomorrow. They see a future that others cannot see. In my discussions with such rich people, I used to ask them what they read. After the usual and expected Wall Street Journal, the daily local paper, the newsmagazines, the newsletters, the professional journals, and other financial publications, in an amazingly high percentage of cases, they loved and read science fiction.

When I was three years old, my brother, Jim, became enamored of a radio show called “The Quiz Kids.” These were little kid geniuses who would answer hard questions that even the adults couldn't answer. Jim decided to make me a quiz kid and taught me how to read. Even before I started the first grade, I was already way beyond the usual smart-kid books, and was tackling the daily newspaper and adult-level books with an all-consuming passion. I don't remember how it happened, but I stumbled across Twenty Thousand Leagues under the Sea by Jules Verne, and the science fiction pulp magazines of the day. This was the start of a lifelong love of science fiction. By the time I was eight, I had read all the works of Jules Verne and H. G. Wells and many other pioneers of the genre. I believe that was the basis of my success as a financial forecaster and entrepreneur. Science fiction trained me to instinctively extrapolate the present trends into the future, to think outside the box, just as those authors did.

Even a moment's consideration will convince you that successful businesspeople must be somewhat prophetic. If they aren't, their competitors will eat their lunch. Even the near future will be different from today. In the modern age of information, a trend that in the last century would have taken decades to develop will now show up in months, if not weeks. The rich person must be emotionally able to change all of his or her basic premises in the blink of an eye, and the science-fiction view of “the future that can be” is a big help. It was for me.

RICH PEOPLE'S MIND-SET #7

They Have Burned Their Bridges behind Them

If Columbus had had an easy way out, would he have discovered the New World? What if he was not willing to lose sight of the Azores before he was willing to venture into the trackless sea? The Really Rich will not ask other people to invest in their ventures until they have all their own chips on the table and have closed a backdoor exit. Smart investors will demand just that.

RICH PEOPLE'S MIND-SET #8

They Are Passionate Believers in Their Ventures

Until they have this passion, they are just dilettantes playing around with an idea, and not committed. And their passion has to be more than money. Thomas Edison became one of the richest men in the world when he founded General Electric. His biographers tell us he loved money and enjoyed being rich, but that was not what drove him. It was his passion for his projects and inventions that made him work ungodly hours.

RICH PEOPLE'S MIND-SET #9

They Happily Take Carefully Calculated Risks

They risk their own money and other people's money. But they are not gamblers, relying on chance or forces beyond their control, unless their reading of the future is very compelling. They need a favorable risk/reward ratio. My benchmark for that is 1 to 10 in your favor.

Perhaps the simplest form of risk/reward analysis is to compare the money that could be lost (usually all of the start-up capital) against the potential upside profit. If I am going to put $10,000 into a venture, there has to be a high-probability upside for me of at least $100,000. When I am looking at deals to invest in, I know that despite everyone's best efforts, at least a few of them will fail. That means I have to have a high enough upside to make up for the losers. I then look at the principles I will enumerate in Chapter 18 to see how many of the desirable qualities in that particular venture outnumber the missing elements of success by at least 2 to 1.

The following is an updated article I wrote for The Ruff Times a few years ago. It applies here.

NO BACKDOORS

Here's my list of the things you must have to become Really Rich, roughly in descending order of importance. Without most of them, you won't make it. You might still make it without one or two of them, but I doubt it.

• A supportive spouse. Nothing is more destructive to a marriage or a business than a spouse who is not willing to endure years of deprivation, chronic cash shortages, and fear (the sky-is-falling feeling when you wake up to worry at 4:00 A.M.). Needed is an almost Christlike willingness to refrain from nagging or criticism when success takes longer than expected. Without that attitude, the emotional price to be paid will cause either the marriage or the business to fail.

  If your spouse adds unnecessary emotional burdens to the already intolerable new-business pressures, you will be less effective. Or, in your desire to please your spouse, you cannot, or will not, make the sacrifices necessary for success.

  Kay was always totally supportive. She believed in me with all her heart, and did her best to make home a heaven on Earth. Without the support of your spouse, starting a new business is next to impossible. More than once, Kay offered some advice that I ignored, but I have since learned that she has good instincts and that more than once I should have listened.

  Remember the lessons of Chapter 2: A good marriage is worth a lot more than being Really Rich. If push comes to shove, settling for Safely Prosperous might be just fine.

• No backdoors. Starting a small business is an all-consuming, frustrating, exhausting effort. If you have an easy out—a terrific job to go back to, a lot of cash, or a rich dad to fall back on—you probably won't hang in there when it is tempting to give up.

  Almost every successful business has had occasions when all seemed lost. Those who refused to give up made it. If you have a backdoor, you are much more likely to quit when things seem hopeless. If you really want to succeed in business, burn your bridges so there is only one way to go—forward. The Japanese learned early in World War II that a kamikaze was more likely to complete his mission if the wheels of his plane fell off as he took off.

• Incurable optimism. Small businesses rarely succeed when the founder is a pessimist or overly cautious with an “accountant-like mentality.” I'm not knocking accountants; any business needs good ones as part of a successful team to help you understand the tax or profit possibilities of proposed courses of action, and to provide the financial statements that will tell you how things are really going. Not all of them have accountant-like mentalities. I mean the timid souls who see only problems where the entrepreneur sees opportunities.

  When real entrepreneurs see an opportunity, they pounce on it. If they keep their eye on their objective, obstacles are merely exciting challenges. They believe in themselves, their products, and their mission, despite everyone else's pessimism.

  Napoleon Hill's great book, Think and Grow Rich, says, “No great enterprise will ever begin if all obstacles must first be overcome.” That is the entrepreneur's creed. Optimism ultimately prevails because skepticism eventually crumbles under the relentless pressure of an incurable optimist. Nobody will follow a skeptic very far. The optimists sweep others away with their enthusiasm and spur them to greater performance heights by giving them a sense of mission. Optimists have to hire some pessimists to keep the books and deal with the banker, but they should keep the pessimists out of their lives as much as possible because they will stifle the entrepreneur's dream. A start-up business without incurable optimism is dead meat.

• The ability to postpone gratification. Budding entrepreneurs must be willing to deprive themselves now to get the big rewards later. If they insist on taking a big salary out of the budding business, they will suck it dry before it matures.

  When my sons bring me a new business plan with a big salary for themselves, I toss it back. They won't have the sense of desperation that forces them to land that contract now, to make that sale now, to rush that project to completion now!

  Postponement of gratification is the surest sign of maturity. Many (not most) successful entrepreneurs live high lifestyles—big cars, big houses, flashy rings, and so on—as the postponed payoff for years of deprivation when they hardly knew what they were going to eat, let alone which car to buy. They enjoy it to the fullest when rewards come, because they paid the price first. Perhaps this satisfies some subconscious, deep need to flaunt their success before the cynics who said it couldn't be done—rubbing their noses in it as a sort of delicious revenge. The conspicuous consumption is understandable after the years of self-denial—and very common.

• Intellectual honesty. Real entrepreneurs maintain a delicate balance between rampant optimism and realism. They admit it when their product falls short of expectations and needs to be improved. When they look at accounting numbers, they don't allow their optimism to cloud their good judgment. They face their problems and deal with them, while never allowing problems to convince them that “it ain't gonna work.” Because they are honest with themselves, they are also honest with others. When they hire people, they candidly lay out the risks and rewards, but their optimism still shines through. They rely on their accountants for real numbers, but don't allow those numbers to destroy their dream when they look bleak, because they believe that through hard work and ingenuity, they can change the numbers. But they face the truth as it is.

  If an entrepreneur isn't intellectually honest, sooner or later some fact he or she refused to face will rise up and bite him or her. Optimism won't save him or her if it is built on the sand of unfaced facts. Pessimists distort this principle to justify their pessimism. They say, “Here are the facts. It's terrible. There's nothing you can do about it. Give up.” The intellectually honest optimist says, “Here are the facts as they are. I acknowledge that, but I can change them, and I will.”

• A friend or partner. Usually entrepreneurs have skills in one or two areas, but are woefully lacking in others. They might be great salespeople, but know nothing about production or accounting. They might be an electronics genius or inventor who couldn't sell worms to fishermen, and to them, accounting is witchcraft. They need a business associate who shares their dream and supplies the skills they do not have. All my major successes have been shared with such a partner.

  When I started my Reading Dynamics school, which, despite my subsequent failure, was very successful for several years, I shared my dreams with John Manson, who believed in them and helped me execute them. When I founded The Ruff Times in 1975, I had Terry Jeffers, an administrator and computer expert from IBM. I concentrated on reading, writing, and marketing, and Terry ran the business. I could dump my dreams all over Terry and John, and they reinforced and supported them. They weren't fire-control rhinos and they believed in me. They supplied skills that enabled me to concentrate on what I do best.

  One of my most important business strategies is to assess my deficiencies and my strengths, then spend my time doing only the things I do best. That takes intellectual honesty. I either hire or affiliate with people who can do the things I do not do well. Once you honestly acknowledge that you don't do some things well, and turn those things over to competent people who can share your dream, you are unleashed. It's people leverage.

  Some people have a strong enough ego to stand alone, but most of us do a heck of a lot better with someone shoulder to shoulder with us, to plug the holes in our defenses.

• A strong ego. I don't know any successful businessman who isn't an egotist, although some are better than others at concealing it. There is a crucial difference between a big, strong ego and a big, fragile one. I know some very talented people in my business who get offended easily and are constantly on the alert for slights and insults, real or imagined. People with strong egos simply shrug off most criticism and only counterattack when good business judgment says they must. They usually just sail serenely on their self-confident way.

  My ego is at least as big as that of anyone in my business. Without it, I never would have believed that my deathless prose or unorthodox economic views were worth charging for, but whenever I would let my ego affect my business judgment, disaster lay dead ahead.

  The clearest sign of a strong, secure ego is the ability to laugh when the joke is on you, to take a lot of kidding without pain, and to never doubt yourself despite the ridicule of the majority. I know my ego rubs some people the wrong way, but being 73 years old, I seriously doubt if my personality will change much. My family helps me keep my ego under some control. If Dad gets too pompous, my kids are wonderfully creative at bringing me down to earth. Around the Ruff house, the joke is usually on me.

  Only a person with a secure ego will face reality, admit mistakes, cut losses, and change directions. A strong ego reflects itself in many ways, some of them rather obnoxious; but usually the braggart or the temperamental artist has a fragile ego, not a strong one. A wise person once taught me the true definition of temperamental: temper and mental.

Secondary, But Still Important

Here are a few more points that may not be as fundamental as the preceding ones, but can increase the success odds of a small business.

• You need a business plan. A business plan isn't just an idea or a narrative. It's a concept reduced to numbers on a month-by-month projection. It realistically projects expenditures and income monthly for two years and quarterly after that. It's usually done on a computer spreadsheet. You can also play “what if” business “war games.” Sometimes these exercises will tell you that an idea isn't worth it, even if it comes out as expected.

  Without a business plan and spreadsheet, you don't have the slightest idea whether or not your project is even worth doing. You don't know how much capital you need or where your potential pitfalls are.

  A good computerized business plan can be revised constantly with a few keystrokes as the real numbers come in and become more and more accurate. Without a business plan and spreadsheet, you need a lot more dumb luck. I'd rather be lucky than smart, but I'd hate to have to bet on it.

• You need a position. A position is a simple concept that focuses on a relatively narrow segment of the market. When people bring me business deals, they often emphasize how their concept is for everyone. Successful businesses usually have found a relatively narrow market segment and have had a relatively simple product or service to offer it. The right name or advertising slogan can automatically define that position.

  One example of positioning was Free the Eagle's fight against the IMF funding several years ago. Our position was simple: “They're bailing out the big banks with your tax money.” Not only was it true, even though the issue was more complicated than that, but it clicked into place in people's heads and it was very difficult to drive out. That simple position won the battle of public opinion. We killed the bill.

  The more specific and specialized your product or service, the more likely it is to be successful. In this great nation, even a narrowly focused concept should be big enough to make you rich. A concept that tries to be all things to all people is a 100-pound marshmallow; no one knows where to start eating. It generally does not cause people to flock to your door.

  You can broaden your concept later, but only within your position. (More about this in Chapter 19.)