Lesson 21: Managing the Money

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Morning, another beautiful day in paradise here. Take a second, take this all in. Gorgeous sunrise on the east coast of the U.S. Good morning, happy day.

For our last piece of foundational core content and element of building resilience in this pillar, we need to talk about something important, managing the money. Now, what do we mean about that? Well, money is important. So if you've created products and services with strong core values and you're operationally incompetent, competent enough, not incompetent, but competent enough, you will earn revenue.

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You'll earn money. You'll have expenses as part of that that you'll need to pay. You'll maybe have some credit card bills.

Maybe you took out a loan or something, so you'll need to service that debt and pay those bills. You'll need to account for all of these things. You'll need to have entries in a ledger.

You'll need a bookkeeper to keep track of these things. You'll need to file taxes with your local domicile here in the United States. It's the Internal Revenue Service.

And those tax rules are different than accounting rules, right? Accounting is a unit of measure. Tax is more a unit of payment that you owe for living and operating in a country. Different countries around the world have different tax rates we won't get into.

So this accounting is important because what that lets you do is it lets you, as an investor let's say, compare and contrast the results, the operations between different businesses. They could be completely different businesses. One could be an energy company.

One could be a fashion company. One could be a technology company. All sorts of businesses.

There's tens of millions, maybe a hundred million around the world. So that becomes important to have a consistent set of rules for how you account for these things. The most basic, the income statement, is essentially a top-to-bottom list of how you earn revenue and what the costs and expenses are that add up to your profit and then determine how much tax you pay on that at the end of the year to the government or the state in the United States.

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So this then gets, so that's how you sort of manage some of the money. But the real question is what do you do with it? So let's say you eke out a profit. Really good companies have higher profit margins.

They get to keep more of the cash that they earn and that's because they're operationally competent, they're efficient, they've designed the business, the product, the service in such a way that they can deliver against their promise to the market in a differentiated or defensible way. And because of that, they're able to keep more money for themselves. And now here is the critical piece, and this goes all the way back once again to core values, which is why are you doing the thing you're doing? Are you doing the thing you're doing to earn money? Or are you doing the thing that you're doing so that you can keep doing the thing you're doing? So do you earn money to earn money and your goal and your end state is money? Or do you earn money to make a product or service so that you can pay for your living expenses and you can spend all your time and energy focused on doing more of that, creating more? So the trap you get into is that if you're in it for the money, all the other stuff becomes fake and inauthentic.

And that's one of the primary reasons why these brand campaigns for authenticity aren't hitting in the market. And younger generations are really savvy. They've been on the internet since the jump.

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And they have a really good sniffer and they can sniff this stuff out super quick and easy. So if you're not in it for the love of the game, which is just making a really great product or service, Walt Disney, Steve Jobs, Apple, Disney, you're going to get found out and you won't make as much money as you could. You won't get the double, triple benefits.

So the folks that are just extracting returns for return sake will not do as well. They just won't over long time horizons and long durations. I mean, Disney and Apple, look at that.

Companies that Disney's been around more than 100 years, pretty long duration in this world. Their content, they'll put out re-release content. It'll still make a hundred million dollars 60 years later.

What? That's crazy. Like it's stuff we've all seen and know about and new generations discover it and buy it and engage with it. Like look at Mickey Mouse, right? So that's the difference that you get.

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Instead of here today, gone today, it's here today, here forever. So that's the difference there. So then you get into this idea of capital allocation strategies.

So a lot of finance folks, investment folks, especially in larger organizations, they need to figure out this thing called a return on investment and a payback period. So everyone is looking for quick returns, right? So I don't want to mess up my income statement from year to year. I want to put an investment into a product, into a service, into a team member, into a contractor, into third party suppliers or software.

And I want to make more money because of that in the same year. That's a growth strategy if you're a provider or a supplier to another company or even a consumer. If the thing that they buy from you helps them earn money more rapidly, see our prior videos, they will continue to use you.

It's a service, it's utility, it's an investment with a fast return. Some investments have longer time horizons on them. Some of them have complete unknown time horizons.

When you're operating in completely unknown territory and you go to the end of that road and there's no more pavement left and it's just blackness, nothingness, no human has ventured there before, that return is unknown. Unknown if you'll get it today, tomorrow, ever. But you will get a return from it because you'll learn something by going into that forest and exploring and figuring out what's there, what's not there, what works, what doesn't work.

So the capital allocation needs to be an investment in research, in development, in learning, and that you get better at it and better at it over time such that you can do it much faster, more efficiently. And when the things do hit, you're able to have a jumpstart and head in the market by years, maybe decades, because you're good at it and you can do it again because you have skills. So your return at first isn't as great, but they start to compound over time and they reach critical mass just like social networks reach critical mass or brands reach critical mass.

So that's a little bit on capital allocation and really the folks that are very risk averse, they want to allocate capital to things that are less risky, are liquid, which means I can get my money back out if I get scared and something isn't working the way I wanted it to work. So these are the folks that you see buy high and sell low, which is not what you want to do because they get spooked, they get scared, they don't have conviction because it's not built in core values and they're worried about their jobs or livelihoods whatever. So when you meet up, line up with other folks that have strong conviction, strong core values, have built total alignment from front to back, your investment risk is actually lower because not only are they used to that, but they're not worried about these little waves.

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I mean you're sailing on the ocean, of course there's going to be waves, but the boat's strong, the boat's big, the boat's sturdy, the boat's made of really strong, long-lasting, highly durable materials and the captain and the oarmen and women are also made of those strong, durable materials. They're not here to just like jump overboard at the first sign of a little wave, like they know how to sail the seven seas, you know, they're used to choppy waters and in fact they kind of like the choppy waters because that's what separates them from the rest of the folks and so then it becomes really obvious who the professional sailors are on this planet and who the ones that are just tourists and maybe just tried it for a day, maybe they bought the gear and they thought they'd be Michael Jordan, but the Michael Jordan of sailing. So yeah, I think that's the point in all of this.

So back to the original point, how do you manage money? Well, you got to give it to the right folks that know what they're doing with it and they need to be operationally competent, they need to be skilled in finance and economics and mathematics, they need to be skilled in product development, service development, they need to be skilled in commercializing innovation, they need to be skilled in scaling and they need to be skilled in having seen hundreds or thousands of companies and businesses at every stage, scale, across every industry so they know what works and what doesn't and they've looked at all the financial statements, they've reviewed them, they've talked to and worked with hundreds of operating teams and executives, been in the boardrooms with strategic conversations and discussions and decisions are made such that their probability of success is far greater than the folks who maybe just had a novel idea and maybe don't have quite the same experience and may just get cast overboard at the first sign of a wake or a wave. So yeah, folks that know how to manage money appropriately have been doing it for decades, have made really strong investment decisions based on foundational principles that cannot be broken and they are weighing machines but they have a detector so precise they can just see it, feel it, build it, commercialize it, scale it, grow it before other people even realize what's happening and so they're already halfway between Europe and America and have already landed on shore discovering new lands and working with the folks that are already there, not displacing them, working with them to develop new products, services, environments, experiences, brands and a new way of being. So that's a lot of words.

Yeah, suffice to say just experience wins and so does nature. So all right, that's it. Peace today.

Have a great one and let's keep kicking butt out there. Keep those shirts on. We'll see you soon.