Archives for September 2018

Another Financial Crisis Is Coming: Here's What Investors Need To Know

(Source: imgflip)

We just passed the 10-year anniversary of the Great Financial Crisis, the worst capital market meltdown since the Great Depression. Given that the Great Recession saw the US stock market shed $7.9 trillion in value (global market lost $34.4 trillion) and cost the US economy $22 trillion, it’s understandable that Americans and investors today fear a repeat of this disaster.

That’s especially true when the financial media, always eager to attract eyeballs to boost ad dollars, frequently tout doomsday predictions like Next crash will be “worse than the Great Depression”: experts.

Such hyperbolic and alarmist articles cite super bullish experts like Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, who recently said:

“We won’t be able to call it a recession, it’s going to be worse than the Great Depression…The US economy is in so much worse shape than it was a decade ago…Our prediction is that central banks will go from being feted for ‘saving the world’ in 2008 to being vilified for being impotent in the coming deflationary crash.” – Peter Schiff

The primary reason people like Schiff are so pessimistic about the next economic downturn is the belief that super high levels of debt (both domestic and international) at all levels, consumer, corporate, government, will result in a financial deluge. One that will make the financial crisis of 2008-2009 seem like a mere sprinkle in comparison. Should such doomsday prophecies prove true, stocks (SPY) (QQQ) (DIA) could be set to fall far more than the 57% decline seen a decade ago. That would be potentially double the 34% average peak decline seen in the 11 bear markets since WWII.

(Source: Moon Capital Management)

Given that this would decimate tens of millions of retirement accounts, just when so many baby boomers are either retiring or already enjoying their golden years, many investors are understandably sweating such sensational predictions.

Now I’m not going to blow smoke and tell you that high US and global debt levels are not a risk, because they certainly are. But in an effort to restore sanity to this discussion and talk readers out of making a potentially costly mistake (like staying away from stocks entirely), I’ve decided to do a multi-part series looking at the risks of another financial crisis. Over the coming weeks, we’ll be looking at the various levels of consumer, corporate, and government debt to see just how likely they are to trigger another financial cataclysm. Finally we’ll end the series with a look at how investors (including retirees) can protect their wealth should another Great Recession strike.

So let’s kick things off with a look at US consumer debt, which was the trigger point for the Financial Crisis. Specifically let’s see why it’s not likely to be the fuse that lights the powder keg of the next one.

US Consumer Debt Is Now At All-Time Highs BUT…

(Source: Motley Fool)

Many doomsday economic predictions point to US consumer debt being at new all-time highs. And indeed it’s true that consumer debt in aggregate is up about 5% or over $600 billion in the past decade.

But note that mortgage debt, the underlying trigger of the 2008-2009 meltdown, has actually fallen. That’s because mortgage lending has tightened up considerably and the days of NINJA (no income, no job or assets) subprime mortgages, are gone. What small amounts of subprime mortgages are being created are neither supporting trillions in derivatives nor owned by systemically important financial institutions (too big to fail banks).

Credit card debt and personal loans have similarly either declined or been largely unchanged, as US households have spent most of the last decade deleveraging.

What about the sharp rise in US auto and student loans? Well, that can be explained by a few key factors. For one thing the average new vehicle price has risen 27% from $28,350 in 2008 to $36,113 at the end of 2017. This is partially due to the rising popularity of cross-overs and trucks.

In addition, the average duration of a car loan has grown to 69.5 months, or nearly six years. The longest loans are for 96 months, or eight years. This is partially because 25% of car loans are now subprime (FICO score under 620), and buyers want to minimize their monthly payments. Longer duration loans with higher interest rates mean US auto debt has grown substantially.

What kind of threat does that pose to the financial system?

(Source: Business Insider)

Well, at first glance, it seems substantial. Today subprime delinquency rates have surpassed the levels of the financial crisis and are at their highest levels since October 1996. Similarly, subprime auto loan losses are approaching double-digit levels.

(Source: Business Insider)

But there are two important things to point out. First, delinquency rates were higher in 1996 and it didn’t result in a recession back then. Neither did loan losses being at the same high levels in late 2003. In fact, in 2003 we were at the tail end of a recession which is why subprime auto loan losses even reached that high in the first place. Why am I not sweating rising subprime auto loan losses now? That’s mostly because of who is making the subprime auto loans.

It’s not the auto companies or the major banks, but mostly smaller private equity backed firms like Summit Financial Corp., Spring Tree Lending, and Pelican Auto Finance, all of which have recently gone bankrupt. These companies borrow from big banks to fund their loans, which are then sold off as asset backed securities, or ABS. These are high-yielding high-risk income investments that other investors buy, which allows the subprime lender to recycle their capital and keep making new loans.

While the business model is similar to the subprime housing disaster, keep in mind that subprime auto lenders have been going bankrupt in large numbers for the last two years. That has barely caused a blip on the radar of the broader financial markets or banking profits. The reason that subprime auto isn’t likely to sink major financial institutions is because subprime mortgages were turned into dangerously levered bets by big banks (up to 30X leverage).

While true that in a recession such losses would rise, the point is that subprime auto lending itself is neither likely to trigger a recession nor cause a full-blown financial crisis. Rather it will be investors in subprime auto lenders and private equity firms that suffer, because major banks are not levered to the hilt on subprime-backed auto loans.

What about soaring student loan debt? That is due to two main factors.

First, the inflation-adjusted annual cost of college, both private and public schools, has more than doubled in the past 30 years. That’s because the value of a college degree has increased enormously since the Great Recession.

Since 2009 about 75% of all net new jobs have gone to college graduates. That’s because about 10,000 baby boomers are retiring each day and companies are needing to replace these highly skilled and experienced workers with people who can perform similar tasks.

But it doesn’t matter why students are taking on more debt, doesn’t $1.5 trillion in student debt potentially pose a risk of another financial meltdown? Actually no, for a couple of reasons. The first is that very little (under 20%) of student loans are securitized, and thus capable of spreading financial risk like subprime mortgages.

Mortgage-Backed Securitization In Trillions Of Dollars

(Source: upfina.com)

Then there’s the scale of the mortgage securitizations that we saw in the housing bubble. Every single year more home mortgages were bundled into loans (including those backed by subprime NINJA loans) than the cumulative student loan burden today. That smaller scale alone means that student loans aren’t likely to cause another financial crisis. How can we be confident of this? Because student loan delinquency rates have been high or rising for about five years now and have not blown a major hole in bank balance sheets.

(Source: upfina.com)

Ok, so maybe subprime auto loans and student loans aren’t going to cause another financial meltdown. But what about the fact that total consumer credit is once more at all-time highs? Doesn’t that mean that another crisis is imminent? Well, no actually, because we have to remember to put total consumer debt levels in context.

…That’s Not Likely To Cause Another Financial Calamity

Yes, consumer debt has never been higher in the history of the US, and is up over $600 billion since 2008. However, you have to keep in mind two things. First, the US population and economy have grown immensely since then.

  • US Population 2008: 304.1 million
  • US Population 2018: 328.7 million (up 24.6 million or 8.1%)
  • US GDP 2008 (not adjusted for inflation): $14.7 trillion
  • US GDP 2018: $20.5 trillion (up $5.8 trillion or 39%)

In the past decade, the US population has grown by the equivalent of the combined populations of Florida and Nevada. While US consumer debt is up 4.7% in the past 10 years, that’s spread out over a population that’s 8.1% larger. Thus on a per person basis consumer debt is actually lower.

And that debt is now more easily supported by an economy that’s about 40% bigger. Sure that’s not adjusted for inflation but remember inflation reduces the burden on borrowers since loans are repaid in dollars with less purchasing power. More importantly, at an aggregate level US household leverage (debt/assets) is way down over the past 10 years.

In fact, America’s household leverage ratio is now at its lowest level since 1985 (33 years). And as a nation our inflation adjusted net worth per capita is at an all-time high meaning that servicing that debt is not hard.

Now it’s true that greater wealth inequality means that any given individual may not necessarily be able to pay off rising debt with asset sales. And much of those assets are in the form of real estate and stocks, which can rapidly fall in value or are not highly liquid.

So let’s instead look at what percentage of household disposable (post tax and mandatory cost of living) income is going to paying interest costs. In Q1 2018, the figure was 10.2%, one of the lowest levels in the past 40 years. But what about rising interest rates? Won’t that cause rising consumer debt defaults that might tank the financial system yet again?

Probably not, for two reasons. First, note that interest rates are not expected to rise nearly as high as they hit in 2000 or 2007. At that time households were spending 12.5% and 13% of disposable income on debt service.

Second, we can look at the St. Louis Fed’s financial stress index to see the state of the overall US financial system today. This is an indicator consisting of 18 metrics tracked on a weekly basis by the St. Louis Fed. A reading of zero is correlated to the average financial stress over time. Today that reading is -1.3, indicating below average financial stress. That’s despite high and rising auto and student loan delinquencies.

Thus we have further proof that today’s consumer debt levels are just not likely to cause another financial crisis, but probably won’t even trigger a mild recession.

So does that mean that another financial crisis will never be triggered by consumer debt (or any kind of debt for that matter)? Of course, not. Financial crises have been with us for over 400 years, and will happen every few years. But it’s important to remember to put such periods of financial turmoil in context.

Another Financial Crisis Will Happen One Day But Isn’t Likely To Cause An Economic Meltdown

Since 1982 there have been no less than seven major financial crises including:

  • 1982: Latin American sovereign debt crisis: resulted in IMF bailout
  • 1980’s US Savings and Loan crisis: resulted in over 700 S&Ls going bust
  • 1989 US Junk Bond crash: resulted in bankruptcy of Drexel Burnham Lambert, the fifth largest investment bank of its day
  • 1994’s Tequila Crisis/Mexican Currency crash: resulted in $50 billion US government bailout/loan guarantee
  • 1997-1998 Asia/Russia Currency Crisis: Resulted in $40 billion bailout by IMF and Fed orchestrated bailout of Long-Term Capital Management, a hedge fund with $126 billion in AUM at its peak
  • 2000-2002 Dot Com Bubble: Nasdaq fell 80% peak to trough, many tech stocks fell more, numerous went bankrupt
  • 2007-2009 Financial Crisis: subprime mortgage/toxic derivatives-based meltdown

And note I’m not even including more minor periods of financial market turmoil like the euro sovereign debt crisis of 2009 to 2014. Yet despite numerous financial crises since 1982, there have been just four recessions in the US.

With the exception of the Great Recession, all have been mild, averaging just a 1.5% peak to trough dip in GDP. And most of those were not directly caused by any of the above financial crises, but rather a normal part of the business cycle.

The point is that there is a 100% certainty that we will have another financial crisis in the future. In fact, one usually happens every 4 years. But unlike the catastrophe of 2007-2009 that many fear is returning soon, most of these are like the euro crisis and result merely in stock market volatility. They don’t usually cause negative GDP growth, and certainly not a recession “worse than the Great Depression”.

Bottom Line: Consumer Lending Isn’t Likely To Cause Another Financial Crisis So Don’t Panic And Sell All Your Stocks

Financial crises are something that have existed for centuries, effectively since modern capitalism started. Asset bubbles driven by rampant speculation, misallocation of capital, and yes, excessive debt, are something that will always be with us.

So while it’s true that another financial crisis will occur at some point, it’s important to remember that most of these are relatively minor, and far less devastating than what occurred during the Great Recession. It’s impossible to pinpoint when and where the next crisis will spring from. But looking at the actual US consumer debt data today, it’s not likely that consumer debt will be the trigger point of the next major capital market meltdown.

In coming weeks, we’ll explore the risks that corporate and government debt pose to the economy and stock market. We’ll also explore the best ways for investors, including retirees or near retirees, to protect their wealth, and to avoid being impoverished even should another financial meltdown strike.

Ultimately the goal of all investors should be to take a balanced, evidenced-based approach to risk management. That means being aware of global and domestic economic risks. But in a way that doesn’t let these fears of potential worst case scenarios scare you out of buy-and-hold long-term investing. That’s because market history shows this is the best way for building wealth and achieving your retirement goals.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

American Midstream: Remorseless ArcLight Goes For The Jugular

Sometimes shareholders just cannot trust other shareholders to stand with them. General partner ArcLight has a fair number of limited partnership shares of American Midstream (AMID). After some bad luck and a misstep or two, the limited partner unit now trades for about a third of the highest price just a couple of years back.

One would have thought that ArcLight would work to restore the luster of this once thriving partnership. But instead, ArcLight knows a great deal when it sees one. The end of the third quarter is “window dressing time” for institutional funds. Therefore, to the detriment of long-term unit holders, ArcLight would like to take the partnership private at the “bottom of the market”. In fact ArcLight even waited for the window dressing period to depress the unit price as much as possible when making its latest offer to buy the partnership.

The offer from ArcLight was for a whopping $6.10 per limited partner unit. The shares of course rallied above that price. But ArcLight knows Mr. Market pretty well. Long-term holders would probably get disgusted enough to sell their shares to traders who would be happy for a small short-term profit.

ArcLight can increase the offer another 10% to 15% down the road to assure market acceptance at a premium to what the units are trading. However, ArcLight typically does not go for small profits. The firm usually aims to make far more money than 15%. The actions of ArcLight actually give credence to the value arguments that American Midstream is probably worth about $10 to $12 per limited partner unit. ArcLight is probably betting that the market will not bid the unit price to anything close to full value. Then ArcLight can take American Midstream private and realize the value of the assets in other ways.

This ArcLight strategy takes advantage of the very poor market attitude towards this limited partnership. Normally, after a period of poor earnings and an over-extended capital structure, Mr. Market wants a growth track record before restoring a partnership to its full value. ArcLight appears to be impatient with Mr. Market. So the general partner has devised a way to speed up the return to full valuation.

A few years back an investor could hardly imagine this situation. American Midstream was growing and the unit prices were heading towards the high teens. Periodic distribution increases were the order of the day. Then came the merger with JP Energy Partners. The ballyhooed effects of that merger were definitely not apparent after one year. The unit price lagged severely as it often drifted towards $10.

Source: American Midstream Presentation At MLP & Energy Infrastructure Conference May 2018

ArcLight sold some under-performing divisions and then replaced those divisions with other divisions. But then a pipeline ruptured at the bottom of the sea and forced the general partner to contribute to the partnership while Delta House awaited the return of contracted volumes. Some commentators saw no progress between contributions from the general partner the year before for a warm winter.

Then came the disastrous offer for Southcross Energy Partners (SXE). That was it. Mr. Market had had enough of missed guidance and unfulfilled promises. A distribution cut to deleverage the balance sheet was the final nail in the coffin. The partnership units were left for dead.

But this is one general partner that is not about to leave a discount on the table. It matters not that ArcLight helped the partnership earn that discount to asset values. If the market would not value the partnership properly in the eyes of the general partner, then the general partner would buy the partnership. Later the partnership could be sold in pieces or repackaged and sold to the public at a later date. Profit is profit. ArcLight is not an organization that leaves spare change hanging around.

The Southcross merger termination came with an announcement that Moody’s upgraded the liquidity rating of the partnership. That was followed by the second-quarter report where management announced a lower leverage ratio and further progress towards forecast goals for the year. Still the progress made did not impress Mr. Market at all. After all, the distribution had been cut significantly. Therefore nothing else mattered but that distribution cut.

Obviously long-time shareholders would like to see the general partner make good on those long-term (great return) promises. Obviously, ArcLight never told the other shareholders that the bright future the general partner had in mind did not include the limited partner unit holders. Evidently the limited partners could bear the risk of failure without the rewards of success.

Hopefully the limited partners now realize that ArcLight managed the partnership for aggressive growth. Income, even speculative income was never the main goal. The generous distributions were a side benefit of a very aggressive growth strategy. More importantly, if the market punishes the partnership “too much,” then ArcLight as the general partner will take the partnership private to realize a second profit by obtaining full value for the partnership assets.

Maybe ethical behavior would dictate a public auction and sale of the limited partnership assets (or some sort of recapitalization followed by a return to growth). Clearly ArcLight went for the maximum profit plan and set the ethics part aside. This is something that potential long-term holders should keep in mind for any future ArcLight-led ventures that are potential investments. Clearly, ArcLight looked out for the interests of ArcLight first without worrying about the future consequences caused by unit holders taking a loss in their American Midstream investment.

Investors can vote no on the coming shareholder vote for the ArcLight offer. Probably the best that will happen is a 10% to 15% increase in the offering price. The conflicts committee clearly has proven to be a rubber stamp body that is worse than useless to the small shareholder. Lawyers may not be much help in this situation either. Probably the best thing to do is sell the investment and move on. Promise yourself that you will not support any ArcLight ventures in the future regardless of the profit potential. If enough investors shun ArcLight’s products, then maybe it would behave differently in the future. But definitely do not count on an overnight transformation in favor of the small investor.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

Disclosure: I am/we are long AMID.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Where Big Money is Made Licensing Product Ideas

Industries are not equal in terms of generating royalties for product ideas. “Where is the big money in licensing being made?” is a question I get asked all the time. I get it. You could end up spending quite a bit of time developing a new product for the market and licensing it, only to be disappointed by the size of your royalty checks.

The solution is simple. Before you spend too much time on any one of your ideas, do the math. You can get a sense of your potential passive income pretty easily. Make a list of potential licensees. Select one. How many stores carry their products? If stores sell less than one unit a week, your product will get kicked to the curb. Then estimate the wholesale price of your product, which your royalty will come off of.

Calculate what you would earn if your royalty was three percent. What about five percent? Seven?

If the company is selling in 10,000 stores, the wholesale price of your product is 10 dollars, and your royalty is five percent, you would earn 50 cents for every unit sold, resulting in $5,000 a week. That’s $260,000 a year selling half a million units. Not bad.

Here’s a breakdown of some popular industries to invent for and where the big money is.

Novelty Gifts

I started out licensing my ideas for novelty gifts. Most novelty gifts are seasonal. As a result, the ideas I licensed for Valentine’s Day, Easter, Christmas, and graduations produced low royalty streams. Companies needed to fill their distribution channels with new products, but they only sold for about 60 days. I earned about $10,000 for ideas like these. That worked for me, because basically all I had done was show a very simple sketch. I’d spent very little time or money.

If you like to come up with silly and whimsical product ideas, focus your energy on events that are celebrated daily, like birthdays and anniversaries. I began coming up with my own novelty gift ideas because the inventor of the pet rock was from my hometown Los Gatos. I could not believe how well his product did!

This industry is always looking for new ideas. A rough sketch is basically all you need. Sometimes even a short paragraph is enough.

The same downsides apply to summer toys. The selling window is short! Your licensee might have wide distribution, but still. On the other hand, there are hit number one hit toys like Bunch o Balloons — licensed to ZURU — that produce a ton of revenue. In my opinion, it’s not easy to make big money licensing summer toy ideas. The competition is stiff.

Toy and Game

Who doesn’t want to relive their childhood and play with toys? It is extremely difficult to succeed at making big money toy licensing. So many people are chasing a number one hit toy. I experienced the mania firsthand when I worked at the startup that brought Teddy Ruxpin and Laser Tag to market. If you succeed at producing a hit toy, your royalties will be monumental.

I got lucky once. My toy idea could not have been simpler. I loved basketball and so I shot hoops in my office with an indoor Nerf set. The backboard was boring; it had just a small image of Michael Jordan. Why not shape the backboard itself into image of Michael Jordan? Three days after I contacted Ohio Art, they sent me a contract. I was extremely fortunate to earn royalties for 10 years. The Michael Jordan Wall-Ball was in every major retailer; there were even commercials on Saturday morning. If my memory serves me correctly, I made about $100,000 that first year. Not bad for a $10 prototype.

If you produce a number one hit toy or a toy that sells for many years (an evergreen) the royalties can be extremely large. For example, the inventor of the card game Phase 10 — Ken Johnson — has been earning royalties for decades. That’s the power of a trademark.

The toy industry is full of highly creative people. These companies have been working with outside product developers forever and see thousands of ideas every year. So, it’s tough. If you want to become successful, stick with it. Make relationships. Familiarize yourself with its history. That’s the key to inventing for the future.

Kitchen and Housewares

This industry is on fire! It has been for quite a few years now. Licensing agreements are common. Some are looking for the next gadget, which will have a lifespan of three to four years at best. Others, like OXO and Joseph Joseph, are committed to making small improvements to existing products. These have a lifespan closer to 10 years. That’s what I would stick to if I were inventing for this industry today. No gadgets, just popular products made better.

The pet and hardware industries are thriving and have also embraced open innovation. These are some of the easiest industries for licensing, because they’re looking for new ideas.

Prototypes are helpful and you will need a well-written provisional patent application to secure a deal.

Direct Response Television (DRTV)

Everyone is familiar with “As Seen On TV” products. Today these products are sold everywhere, including social media. This industry moves fast and is capable of selling large volumes. Some of the top companies offer very large minimum guarantees, meaning there’s a good chance your royalties are going to be correspondingly large. If you have a hit, wow!

This is a difficult industry to succeed in. There are only five major players, and they only need one or two big hits a year. They review thousands of ideas, test some, and move forward with just a few. Your likelihood of success is small.

You will need a prototype. Most of these companies do not care about intellectual property.

Consumables

These are products people use every day. Usually only once before they’re thrown away. This is where the big money is.

In my experience, this is also one of the most difficult industries to invent for. Yes, the volumes are enormous. But think of the speed at which products like these are manufactured. If your innovation depends on new equipment, that requires a huge investment of capital. (More than one facility will be impacted no doubt.) All of which adds up to risk for potential licensees.

You will need a wall of intellectual property to secure your ownership over an idea like this.

One example that comes to mind is the Zip It, a tool for cleaning drains invented by my friend Gene Luoma. It’s a thin inexpensive piece of plastic that you can find in every major hardware store. Tens of millions have been sold. You might use it more than once, and it’s not as if this product is used every day, but every home in America has drains that need unclogging at one point.

Only one of my products sold hundreds of millions of units worldwide, and it was a rotating label called Spinformation. It appeared on many different types of products, including water, vitamins, spices, alcohol, etc. These products are used every day.

My royalty was five percent and based on the label’s cost. Not a large royalty. But, due to volume, it added up very quickly. A small account that ran one line generated about $250,000 in royalties, and this was just one category. Because there were so many different categories of products that featured labels, the royalties were very large.

That’s a double whammy. If you invent a product that offers a benefit across many different categories, sells worldwide, and involves consumables, the royalties can easily merit you millions. Spinformation barely scratched the surface of its potential. After all, billions of labels are consumed every day.

Don’t be surprised. It all comes down to distribution.

Happy counting.

Google to Pay Apple $12 Billion to Remain Safari’s Default Search Engine in 2019: Report

Google’s search engine dominance can seem invincible, but that doesn’t mean the search giant isn’t willing to pay billions to ensure it stays that way.

Google will reportedly pay Apple $9 billion in 2018 and $12 billion in 2019 to remain as Safari’s default search engine, according to Business Insider. The report comes courtesy of Goldman Sachs analyst Rod Hall. It seems like a hefty price to pay, but with Safari being the default browser on iPhone, iPads, and Macs—and Google continuing to generate a great deal of revenue from its original search engine business—the Goldman Sachs report finds the payments to be a fraction of the money it ends up making.

“We believe Apple is one of the biggest channels of traffic acquisition for Google,” the report said, according to Business Insider.

Bernstein analyst Toni Sacconaghi additionally revealed in 2017 that Google previously paid Apple an estimated $3 billion. However, the only real number available is from 2014, due to court filings, which revealed Google paid Apple $1 billion for its search engine spot. Considering $9 and $12 billion are big jumps in four and five years, respectively, and that Google and Apple won’t actually disclose the figure, it’s unclear how accurate the Goldman Sachs estimate really is.

50 Habits That Will Make You a Millionaire

OK, so maybe a $1 million isn’t as cool as it used to be. Thanks, inflation, David Fincher’s “The Social Network” and Russ Hanneman!

Making the two-comma club is still a noble financial goal. And an attainable one, with a little luck and a whole lotta work. Or vice versa, depending on where you’re at in life and how much money is already sitting in your bank account.

With that caveat in mind, here are 50 ways that, taken collectively (more or less), could make you a millionaire.

1. Save 40 to 50 percent of your paycheck.

If you’re just starting out in the workforce, “keep living like a student,” Jeff White, a financial analyst with FitSmallBusiness.com, says. Which means, yes, try to set aside almost half of your income. Saving is important, but you’ll also want to …

2. Invest.

Because, let’s face it, these days, it’s pretty much impossible to nickel-and-dime your way to $1 million.

3. Diversify.

Take that 40 to 50 percent of your paycheck and “invest [it] into more than one source,” White says. That includes stocks, bonds, real estate and mutual funds. But if you’re already overwhelmed (we get it: investing is terrifying) …

4. Start small.

There are plenty of investing apps out there that can get you started. Some apps, like Betterment and Wealthfront, are robo-advisers, while others serve as online investment brokers. Think Robinhood and Stash. And then there’s Acorns, which lets you invest your spare change. You can find a rundown of how these apps work here.

5. Mix in long-term investments.

We’re talking IRAs and 401(k) plans. These funds are essential for a stable retirement. But the tax penalties associated with early withdrawals should dissuade you from tapping that money for non-emergencies. In other words, “you don’t feel the temptation of diving into those accounts just to go to Disney World,” White says.

6. Max out an employer-sponsored 401(k)…

If your employer matches up to a certain amount, well, that’s the amount you should deposit into the fund each paycheck. Otherwise, you’re basically leaving free money on the table.

7. … and your annual IRA contributions.

In 2017, for instance, your total contributions to all of your traditional and Roth individual retirement accounts can’t be over $5,500 ($6,500 if you’re 50 or older) or your taxable compensation for the year, assuming your compensation was under that limit.

8. Take part in an IPO.

Terrifying, we know, but think about how much Facebook stock originally sold for ($38 per share) and how much it’s worth now ($214.67 as of writing this.) Of course, be sure to consult a financial adviser before making any major investments.

9. Don’t waste money.

Sounds like a no brainer, sure, but people (ahem, Gen-Zers and Millennials) are into being extra these days. Don’t fall for it, Gen-Zers and Millennials: $400 pants are not an investment.

10. Embrace minimalism.

That’s the theory all those tiny house hunters you’re watching on HGTV subscribe to: Less is more … and great for your bank account.

11. Sell your stuff.

If you decide to downsize — or, maybe, when you decide to downsize — make some money from your still-salvageable stuff. There are plenty of sites and apps, like eBay and Poshmark, that’ll help you sell your gently used wares to the masses.

12. At the very least, trim the fat.

True minimalism isn’t for everyone. (Fumio Sasaki, a leading voice in the minimalism movement, only keeps a roll-up mattress, three shirts, four pairs of socks, a box that serves as a table, chair and desk, and a computer.)

But, even if your budget is already lean, there’s usually at least some place you can trim more fat. Common money-wasters? Avocado toast. Your morning coffee. $1,000 smartphones. You know, the usual.

“Millionaires are made by years of smart financial choices,” entrepreneur Tyler Douthitt says. “Make the cuts to your budget to make it work.”

13. Remember, you’re not cheap; you’re thrifty.

There are plenty of wealthy individuals who are unabashedly frugal. Consider Oracle of Omaha Warren Buffett, who once had a vanity license plate that said “thrifty.”

14. Avoid debt.

Notice we didn’t say “pay your debt down.” That’s certainly important, but also it’s own thing. Like, if you’re seriously in debt, focus more on paying it down and less on making your million, you know?

Future millionaires keep debt to an absolute minimum — even the good kind, which is essentially debt associated with an asset that’ll increase in value. Like a home. Speaking of which:

15. Don’t be house poor …

That’s a term used to describe someone who’s living in a home that’s essentially eating all of their income. So, yes, you might be paying your mortgage, but you’ve also got credit card debt and $0 in your emergency fund. If you can’t save three to six months’ worth of expenses, how are you going save $1 million?

“Only buy a house that fits your family, without feeling the need to be in the most expensive neighborhood,” White said. “You don’t need to build a home from scratch if you’re trying to save.”

16. … but do try to buy a home.

Because it’s an investment. Plus, depending on where you live and how much of a down payment you can put down, a monthly mortgage payment could be more affordable than the one you’re making to a landlord. If you must lease …

17. Keep rent well below 30 percent of your income.

That’s the general rule of thumb when it comes to the cost of housing, but, if you’re trying to hit a mil, you’ll need to aim higher. Or lower, in this case. Think 20 to 25 percent.

18. Properly insure your stuff …

Lest a fire, break-in, explosion, etc. drain your coffers and blow your master plan. And, yes, that goes for renters, too. You can learn more about renters insurance here.

19. … and yourself.

Disability insurance will replace some or most of your income if you’re suddenly unable to work for a period of time. Car insurance covers you if you cause an accident with your vehicle. And, as your wealth grows, umbrella liability insurance can cover anything in between. Bottom line: If you’re trying to build your net worth, you have to protect your assets.

20. Keep your credit shiny.

As anyone involved in the Equifax data breach undoubtedly knows by now, your credit affects everything: how much interest you pay on a loan, what apartments you can score, how high your car insurance premiums climb. The list goes on and on.

To keep good credit, pay all your bills on time (yes, every single one), keep your debt low (told you) and add new lines of credit organically over time.

21. Renegotiate everything.

It’s easy to get entrenched in a contract, but we’d be the first to tell you, it pays to shop around. Call up your current service providers — cable company, credit card issuer, etc. — to see if you can score a lower rate. If not (and your contract is set to expire), take your business elsewhere.

22. Actually, negotiate everything.

Just saying.

23. Doing life? Save less … just not too much less.

Once you get to spouse and 2.5 kids-mode, it gets a lot harder to bank nearly half of your paycheck. Aim instead to invest 20 percent-plus of your monthly income into a retirement account.

That way, “by the time you hit retirement, the compounding returns should easily make you worth much more than $1 million,” White says.

And, listen, if even that gets tricky …

24. Save a minimum of 10 percent of your income.

“No matter what happens,” he said.

25. Automate your savings.

There are ways to make saving a little bit easier. One method involves setting it and forgetting it.

“Every time you have a [paycheck] deposited, have your bank account setup to automatically put a certain amount in your savings account or investment portfolio,” Jay Labelle, owner of The Cover Guy, says.

26. Keep your emergency fund separate from your actual savings.

That way “you don’t dive into your savings or investment accounts if something unexpected happens, which it will with kids,” White says.

27. Avoid the hotspots.

Couples with kids are (probably) less inclined to throw down a bunch of money on $85 pet rocks. But there are certainly temptations prospective $1 million parents will need to negotiate.

“Find memorable, but affordable, vacations,” White says. “You can have a blast with your kids without spending $20K.” Here are some affordable family vacations to consider, if you’re in the market for a getaway.

28. Bank your windfalls.

Sure, you want to buy a new TV or Escalade, but you’ll reach a $1 million much faster if save that money for later.

29. Early to bed, early to rise.

Makes a person healthy, wealthy and wise, you know.

30. Get a side hustle.

If you can’t save more, make more. And, thanks to the gig economy, there are plenty of ways to bring in a little extra income on your nights and weekends.

31. Provide short-term lodging.

Thanks to sites like Airbnb and VRBO (Vacation Rentals by Owner), it’s also possible to make some extra money when you away. You just gotta be cool with renting out your place to strangers. 

32. Start a business.

Who knows? Your side hustle could turn into a full-time gig. Or maybe you’ve got an innovative idea venture capitalists will love. That might sound real pie-in-the-sky, but consider this stat, courtesy of the Cato Institute: Roughly one-third of first-generation millionaires are entrepreneurs or managers of nonfinancial businesses.

33. Go full-fledged landlord.

That could mean scooping up some investment/rental properties as your wealth grows. Or something as simple as renting out a room in your abode to help with your mortgage. We hear house hacks are all the rage these days.

34. Become an influencer.

Dirty word, we know, but, per Forbes, top influencers can take home about $187,000 per Facebook post and $150,000 per Instagram.

35. Never relax …

That’s according to Mark Cuban, and while it sounds … well, kind of terrible, we figured we’d pass it along.

36. … like, ever.

Not enjoying life is actually a theme among self-made millionaires. Earlier this year, VaynerMedia CEO Gary Vaynerchuk said Millennials were financial failures because they watch too much Netflix and play too much Madden. 

37. Exercise.

Studies have found wealthy people exercise more. Plus, you know, it’s good for your health.

38. Lean in.

Wage stagnation has let up at least a little bit since the recession, so you might find there’s more money to be made in your current position. Case in point: Senior executives who changed jobs in 2013 received compensation increases that topped 16 percent, according to a survey from Salveson Stetson Group.

39. Earn your bonus.

Don’t take any bonus options you have at work for granted — and, by that, we mean don’t assume you won’t net the full amount. It might require a mad dash to December, but you definitely won’t get the money if you don’t put in the work. Not already eligible for a bonus?

40. Ask for a bonus.

So long as you deliver on a certain goal, of course.

41. Avoid lifestyle creep.

If you want to make a million, you need to make sure your spending doesn’t increase alongside your income. Seriously. Lifestyle creep is a big problem that’s kept plenty of high earners from maximizing their money.

42. Think like a hacker.

This one comes courtesy of Facebook CEO Mark Zuckerberg.

“The Hacker Way is an approach to building that involves continuous improvement and iteration,” he wrote in a 2012 memo to Facebook shareholders. “Hackers believe that something can always be better, and that nothing is ever complete.”

43. Go on a game show.

I mean, the grand prize for Survivor and Who Wants to be a Millionaire is $1 million.

44. Catch up.

Remember, once you’re over the age of 50, you can make annual “catch up” contributions into certain retirement accounts, including 401(k) plans and IRAs. You can learn more about what amounts you can allot to each account on the IRS’ website.

45. Hold off on taking Social Security.

Also helpful for people who are older, but not quite at the $1 million mark, because, thanks to delayed retirement credits, your can receive larger (in fact, the largest) Social Security benefits by retiring at age 70.

46. Work all the tax breaks.

Flexible Spending or Health Savings Accounts. Commuter benefits. Property tax and mortgage interest deductions (told you it helped to own a home). Make sure you’re capitalizing on anything and everything Uncle Sam offers in terms of tax breaks.

47. Get some help.

The higher your income, the more complex your finances will be. (Case in points: all those tax breaks we just mentioned.) And, at a certain point, it’s a good idea to bring in the professional — a certified financial planner or certified public account — to help you manage your money.

48. Stick with it.

Because you can’t make amass a small fortune overnight. In fact, a 2016 study found it took the average self-made millionaire an average of 32 years to become rich.

49. Believe in yourself.

Because you can make $1 million.

“Confidence will get you through your moments of weakness when you want to pull money out of savings or your investment accounts,” White says. “Keep going, and before you know it you’ll hit your goal.”

Or, you know, you could just cross your fingers and hope you …

50. Win the lottery.

It could happen.

Coinbase Wants To Be Too Big To Fail

THE NEW TITANS OF FINANCE prowl a glass fortress 3,000 miles from Wall Street. High above San Francisco’s Market Street, their headquarters take up three floors with sweeping views of the bay and city below. The reception desk bears jars brimming with chocolate coins near a jokey “Initial Chocolate Offering” sign. Beyond it, in an open space with no corner offices, big shots poached from Silicon Valley giants sit beside junior hires clutching free cans of LaCroix. This is the home base of Coinbase, the buzzy startup that wants to rewire the financial system around blockchains and digital currency.

But good luck finding it. There’s no logo outside the building or in the lobby. Nor is there any signage in the hallway outside that reception desk, just fortified metal doors and an intercom. Coinbase employees maintain a low profile, they explain, because most own virtual cryptocurrency, some 
in quantities that make them multimillionaires on paper.
 A kidnapper could capture someone and “pull out their fingernails,” a staffer says, to learn the location of their fortune—as if betting your career and well-being on a volatile, unproven financial technology weren’t stressful enough.

Such is life at Coinbase, a company where the mood alternates between upbeat and under siege. It was founded in 2012 as an exchange that lets individuals and companies easily buy and store digital currencies, most notably Bitcoin. And by 2017, when investor interest in those currencies moved to the mainstream, Coinbase was perfectly positioned to capitalize, becoming a 21st-century Wells Fargo for a new digital gold rush.

In short order, Coinbase became the first U.S. cryptocurrency startup to earn a $1 billion “unicorn” valuation from investors, and the first to bring in $1 billion in annual revenue. (The still-private company is profitable, according to regulatory filings, though it won’t disclose specific earnings.) Coinbase now claims 25 million customer accounts—a five- fold increase from two years ago—putting it on a par with traditional finance giants like Charles Schwab and the brokerage arm of Fidelity. The tech press is buzzing about new, higher-valuation funding rounds and a looming IPO. And the company’s first-mover status has made it something of a home planet for the universe of crypto-oriented business; a surprising number of top industry figures are connected, in one way or another, to Coinbase and its 35-year-old founder and CEO, Brian Armstrong.

Still, life at the top is tense. Coinbase owes its preeminence in part to last year’s unprecedented speculative surge in cryptocurrency investing. Today the buoyant Bitcoin runs of 2017 seem a distant memory, as more investors question the value of assets that have
yet to prove their staying power. Many of the most popular digital currencies trade 80% or even 90% lower than their peaks last December, and the popping of the bubble has erased a staggering $600 billion in market capitalization. The collapse has meant less trading and less commission revenue for Coinbase, even as new low-fee competitors threaten
 to turn the company’s core service into a commodity—and even as the company recovers from self-inflicted problems that alienated customers during the boom.

Presiding over all this is an introverted founder who sees the cryptomania of 2017 as just one chapter in a longer story. Armstrong belongs to a generation of evangelists who view digital currencies, and the blockchain technology on which they’re based, as tools that will make investing, borrowing, and saving money faster, cheaper, and more egalitarian. And he wants Coinbase to become the banking empire that brings those tools to the masses.

Armstrong and his colleagues have laid the groundwork for that future, carefully wooing regulators and investing in new technology. What he hasn’t done yet is convince the wider financial world that crypto is a must-have technology. If Armstrong can’t eventually make a compelling long-term case, it may be not just Coinbase that crumbles, but an entire industry.

THE IDEALIST: Brian Armstrong at Coinbase’s San Francisco headquarters. “I really want to see crypto be used by a billion people in the next five years,” he says.

THE IDEALIST: Brian Armstrong at Coinbase’s San Francisco headquarters. “I really want to see crypto be used by a billion people in the next five years,” he says.

Winni Wintermeyer for Fortune

GROWING UP IN SAN JOSE, Armstrong often felt bored and confined. His parents, both successful engineers, provided a comfortable upbringing and a brisk intellectual environment. But while Armstrong saw the Internet as a tool to change society—in the same way Apple’s Steve Jobs and Intel’s Andy Grove who built their empires minutes from his househad done with computers and chips, two decades earlier—he fretted that others had beat him to it. “By the time I graduated from college and I was starting to work, I felt maybe I was too late—this Internet revolution had happened,” he said.

Armstrong arrived early, however, for the genesis of a different revolution. While surfing the web at his parents’ house on Christmas of 2009, he encountered a nine-page paper written by a pseudonymous author named Satoshi Nakamoto. The idea it described—a global currency beyond the reach of banks or governments—was so compelling he began to read 
it again, tuning out his mother’s entreaties to join the holiday festivities downstairs.

Nakamoto’s paper is now famous for describing the architecture of Bitcoin—and the broader notion of using a global network of computers to maintain a common record 
of any kind of transaction. Like other early believers, Armstrong became enamored of the idea of a financial system that could minimize the influence of middlemen and politicians. His fixation grew after a trip to Argentina. He recalls sitting in restaurants in Buenos Aires where prices on menus were covered with stickers that changed almost daily—symptoms of rampant inflation that had wiped out the savings of ordinary people. Bitcoin, he thought, represented a way to store or transfer wealth beyond the control of rapacious states. It was digital gold.

Childhood photograph of Brian Armstrong. Armstrong says he saw the Internet as a tool to change society: “By the time I graduated from college and I was starting to work, I felt maybe I was too late—this Internet revolution had happened.”

Childhood photograph of Brian Armstrong. Armstrong says he saw the Internet as a tool to change society: “By the time I graduated from college and I was starting to work, I felt maybe I was too late—this Internet revolution had happened.”

Courtesy of Coinbase

For this vision to come to pass, though, ordinary people would have to use crypto- currency—and in its early days, that was wildly impractical. Would-be Bitcoiners had to engage in a recondite rigmarole of downloading “wallet” software and then funding the wallet with an offshore bank transfer or working with shadowy middlemen.

Armstrong’s vision was to make the process more akin to buying stock online. In 2012, he left his job as an engineer at Airbnb to make it a reality. He designed Coinbase to allow customers to use traditional bank accounts to purchase cryptocurrency. Whereas buying Bitcoin had once required serious tech chops, the Coinbase version was more like using PayPal or Venmo. And instead of requiring users to store currency using complicated cryptographic keys, Coinbase stored it on customers’ behalf.

There turned out to be plenty of demand for an easy-to-get Bitcoin service; barely a year after launching in late 2012, Coinbase reached the million-customer mark. At a time when concerns about drug dealing and money laundering hovered over the crypto world, Coinbase took pains to comply with know-your-customer laws and other strictures of U.S. banking law. And during last year’s mania, as hundreds of new crypto “coin” investments sprang up, the company—fearful of scams or trouble with the Securities and Exchange Commission—declined to sell the vast majority of them. (Today there are
15 cryptocurrencies with a market cap over
 $1 billion, but Coinbase offers trading in
 only five of them.) Fretting about compliance didn’t endear Armstrong to the crypto world’s self-styled renegades, whose tastes run towards cocaine, Lamborghinis and anti-government diatribes. But it has put Coinbase on the cusp of regulatory approval for a broker dealer license. It is also in talks to obtain a federal banking charter—a once unthinkable idea for any Bitcoin-related company.

“What matters in financial products is the first-mover advantage and who sets the standards,” says Christian Bolu, an analyst with Sanford C. Bernstein. “Coinbase is assuming that mantle and setting the regulatory agenda.”

Charts show price of Bitcoin and estimated number of Coinbase users

Charts show price of Bitcoin and estimated number of Coinbase users

The company is also a darling of blue-chip venture capital firms, including early investors Union Square Ventures and Andreessen Horowitz. The latter’s $25 million investment in 2013 came as the VC community’s first truly big bet on cryptocurrency. The young CEO, his backers say, quickly revealed an instinct for self-improvement. “Every meeting you have with him, he sends follow-up questions,” says Chris Dixon, a partner at Andreessen. “He’s constantly curious and looking for mentorship.” Armstrong’s bid to better himself is almost pathological. Last year, he obtained his pilot’s license but largely lost interest upon becoming satisfied he could fly a plane. At Coinbase, Armstrong will grill employees about what he, and they, could do better: He once emailed his performance review from HR to the entire staff in order to solicit tips.

He consumes large numbers of books, mostly by audio. His tastes include science and behavioral psychology, but lean to management bromides and great man biographies (Steve Jobs, the Wright Brothers, Dwight Eisenhower). Reading Michael Malone’s Bill and Dave, a history of Hewlett-Packard, prompted Armstrong
 to urge employees to approach him anytime with ideas, lest someone else snap them up. “Steve Wozniak, when he was an engineer at HP, brought them the Apple 1,” Armstrong recounts. “He’s like, ‘I built this, I think HP should manufacture it.’ And they said no. And, of course, then he left and created Apple Computer, right?” Armstrong’s nightmare, it seems, would be for success to elude him after being right under his nose.

BUT WHEN SUCCESS did arrive, Coinbase and Armstrong found they had a
lot to learn about managing it. In 2017, as Bitcoin and other digital currencies rose 20-fold or more in value, Coinbase made a killing on trading fees. During the height of the mania, Armstrong has said, Coinbase signed up more than 50,000 new customers a day. This led the company’s website to crash and sputter and leave the site’s engineers to feel like they were holding back an avalanche with Saran Wrap. For some Coinbase customers, the site became a hellish experience, as glitches reigned and orders went unfilled. Twitter and the website Reddit lit up with anguished accounts of money stuck in limbo and customer service tickets landing in black holes, unresolved for days. Dozens of other customers filed complaints with the Better Business Bureau and the SEC.

Hackers, meanwhile, began targeting customers with elaborate phishing and bank fraud scams; Coinbase was at one point spending 10% 
of its revenue on resolving fraud-related issues. Employees weren’t happy, either. The chaos left many engineers and customer service reps working 18-hour days, and some quit in exhaustion.

Another serious hiccup occurred on June 21, 2017, when a high-net-worth “whale” abruptly sold millions of dollars’ worth of the popular currency Ethereum. The result was a “flash crash,” as prices plunged from $320 to under 10¢ before shooting back up again, triggering automated sell orders that resulted in some unlucky investors ditching their whole position for a pittance. Unlike most big stock exchanges, Coinbase hadn’t built a trip wire to halt trading in the case of a panic selloff—a big technical blunder. Armstrong eventually decided to rescue the victims by canceling their side of the trades—a calm-restoring but costly proposition.

At the peak of the crypto boom, Coinbase took another hit to its credibility over its handling of Bitcoin Cash, a spinoff of Bitcoin. It initially declined to support the new cur- rency, then reversed its position after a wave of customer complaints. But in December, just before Coinbase announced the reversal, there was a sudden, unusual uptick in Bitcoin Cash’s price—sparking speculation that Coinbase employees had traded on inside information and bought the currency in anticipation of an influx of new money. According to a former employee, the outcry led Coinbase to abruptly delete two of its channels on the messaging app Slack, which employees used to discuss the crypto market and trading strategies.

Coinbase concluded after an internal investigation that its employees had not engaged in insider trading, and the company tells Fortune it closed the Slack channels out of an abundance of caution rather than any wrongdoing. Given the evolving regulatory regime around cryptocurrency, it’s not clear that trading the currencies based on inside information would even be illegal. Still, the controversy, combined with the site’s customer service woes, sent a message: Just as cryptocurrency was commanding a national spotlight, Coinbase seemed unready for primetime.

Its struggles didn’t scare away investors, however: In August 2017, the startup raised $100 million, giving it a $1.8 billion valuation. That provided Armstrong with the capital and clout to hire talent that could help him right the ship. Coinbase poached longtime Twitter operations executive Tina Bhatnagar to help repair its customer service shambles, and it brought on HP veteran Asiff Hirji as COO. Armstrong has also committed to hiring inclusively: Coinbase, by company rule, interviews three qualified people from underrepresented backgrounds for each open position, and 33% of leadership roles are held by women.

Employees give their boss high marks for staying on an even keel as the crises unfolded. Armstrong himself believes he found his footing as the company grew. At first, he recalls, “I thought [a CEO] had to be a military general, barking orders. But I feel I’ve embraced my own style of leadership, which is a little bit more collaborative. It’s seeking the truth, not trying to be right. I also realized you shouldn’t try to be something you’re not because that’s the worst kind of leadership.”

Coinbase has also doubled its headcount over the past year to nearly 1,000. The extra staffing has helped restore work/life balance and reduce the number of all-nighters. Arm- strong, for his part, is showing his staff that he too can chill out. This includes recapturing some of the vibe from the company’s early days. Back then, Armstrong and Coinbase’s third employee, Olaf Carlson-Wee (who today runs Polychain Capital, the largest U.S. crypto hedge-fund) would team up in epic Halo matches against business VP Fred Ehrsam, a former high school gaming champ. There was also a lot of ping-pong and rock-climbing. Today’s version of chilling out includes Armstrong indulging his penchant for belting Disney songs in the office and at off-site karaoke. One staffer (who calls Armstrong a “great singer”) described the CEO leading a recent Little Mermaid sing-along at a bar in San Francisco’s Castro District.

PART OF YOUR WORLD: Armstrong with staffers at Coinbase’s San Francisco headquarters. The CEO wants the company to eventually become the crypto equivalent of a global bank.

PART OF YOUR WORLD: Armstrong with staffers at Coinbase’s San Francisco headquarters. The CEO wants the company to eventually become the crypto equivalent of a global bank.

Jason Henry—The New York Times/Redux

Customer service, meanwhile, has improved dramatically under Bhatnagar, says Mike Dudas, a Google veteran who runs a crypto-news startup The Block. By mid-2018, Coinbase claimed to have eliminated 95% of its backlogs, and it says it responds to complaints within 10 hours—a far cry from the peak of the Bitcoin mania, when many tickets took a week or longer to resolve.

Of course, if complaints are a far cry from where they were, that’s because Bitcoin mania is too. Cryptocurrency prices have lost more ground since December in percentage terms than the Nasdaq did during the dotcom bust of 2000–02. The research firm Diar recently reported that Coinbase trading volume has dropped from over $20 billion in January to less than $5 billion a month this summer.
Since Coinbase charges commissions that range up to 1.99% of the value of each trade, the simultaneous plummeting of values and volumes is a double whammy. And its margins are under threat from new competition. Over the past year, fintech companies Robinhood and Square and European brokerage eToro have wooed crypto investors with low- or no-cost trading. That ominous drumbeat adds urgency to one of Armstrong’s biggest missions: converting Coinbase into a diversified blockchain-banking giant that isn’t solely dependent on trading revenue.

IT’S A SWELTERING EVENING in Washington, D.C. as Armstrong, clad in a tan suit, sits down for dinner. He and a small retinue are gathered in a hotel restaurant near Dupont Circle, where the food is both expensive and mediocre. Tucking into poached salmon, he reflects on his day meeting lawmakers and senior regulators. Armstrong, ever the Silicon Valley engineer, is not wowed by the political atmosphere. “I think my favorite part was the underground train,” he says, referring to the hidden monorail that whisks elected officials and elite visitors to and from the Capitol. Still, the CEO and his team have been persistent in educating the political class about cryptocurrency and blockchains. And these efforts are paying dividends, as more regulators see the technology as a useful tool rather than an inherently criminal threat—opening more opportunities for Coinbase and its competitors.

In addition to its impending broker-dealer license, Coinbase has won permission to provide custody services for big institutional customers that wish to own cryptocurrency assets. These services could prove lucrative if the company can lure more big players like mutual funds, pensions, and private equity funds to trade with it. There’s already some progress on this front: Earlier this year, its services aimed at professional traders and institutions—primarily wealthy “family offices” and cryptocurrency oriented hedge funds—surpassed its consumer platform as the company’s biggest source of trading volume.

“I don’t think it’s going to be easy,” cautions Richard Johnson, a financial technologies expert with consultancy Greenwich Associates. “The institutional market will be a different one for them to crack,” especially since mainstream fund managers are waiting for a stronger regulatory framework before investing.

Emilie Choi, vice president of corporate and business development. Choi, a veteran of LinkedIn, is a tech M&A specialist; she has helped Coinbase buy nearly a dozen smaller blockchain and finance firms to build out its own empire.

Emilie Choi, vice president of corporate and business development. Choi, a veteran of LinkedIn, is a tech M&A specialist; she has helped Coinbase buy nearly a dozen smaller blockchain and finance firms to build out its own empire.

Stefan Ruenzel—Fortune Video

But recent acquisitions could help Coinbase be ready when that framework emerges. One of its recent hires is Emilie Choi, VP of corporate and business development, who presided over 40 acquisitions at LinkedIn. Since signing on in March, Choi has helped Coinbase snap up nearly a dozen small blockchain and financial firms that could help it provide a broader range of services. Still, for a company that likes to style itself as “the Google of crypto,” Coinbase is still waiting for an encore hit to its trading platform, along the lines of Google adding Gmail or Maps or YouTube to its core search service.

Right now, Coinbase’s most promising project, say Johnson and others, involves a new class of investments known as security tokens, which represent investable assets as tokens on a blockchain. Armstrong has spoken of building an alternative investment market around such tokens, run by Coinbase. Supporters say tokens could be used to convert assets that are relatively illiquid and expensive—privately held companies, for example, or art and other collectibles—into units that are easy to trade.

Trying to understand security tokens and their implications is much like trying to grok the Internet in 1994. Just as people were puzzled by terms like “browser” two decades ago or “app” a decade ago, the vocabulary of blockchain—including “tokens” and “wallets”—is still baffling to many. One of the industry’s better explainers is Coinbase CTO Balaji Srinivasan, a charismatic 38-year-old with spiky hair, salt-and-pepper stubble and eyes that glisten. Srinivasan has written a series of influential essays on tokens’ potential to remake the venture capital industry.

“Blockchains are the most complicated piece of technology since browsers or operating systems,” he says, adding that only a handful of savants possess the expertise in a range of fields—including cryptography, game theory, networking, databases, and cyber-security—to wrangle them. But tokens are different, he explains. They can be built by a much broader class of engineers, while still taking advantage of blockchains’ powerful attributes, such as being tamper-proof and indestructible. And when used to securitize assets, they represent an efficient new way to recognize and distribute ownership.

Balaji Srinivasan, Chief Technology Officer. Srinivasan joined Coinbase this spring when it acquired Earn.com, a crypto startup he founded. He’s an expert on security tokens, tech that Coinbase thinks could be the foundation of a blockchain-based investment market.

Balaji Srinivasan, Chief Technology Officer. Srinivasan joined Coinbase this spring when it acquired Earn.com, a crypto startup he founded. He’s an expert on security tokens, tech that Coinbase thinks could be the foundation of a blockchain-based investment market.

Steve Jennings—Getty Images

David Sacks, the venture capitalist and founding COO of PayPal, sees U.S. real estate— a $7 trillion market that is highly illiquid—as particularly ripe to be subdivided and sold via tokens. “It’s like going from an analog to a digital system of ownership. Today, a deed or private security is a piece of paper in a file cabinet somewhere. A token digitizes it,” said Sacks, who is backing a company called Harbor that creates code to ensure tokens comply with security laws. The real estate idea is already moving from theory to reality: The owners of the upscale St. Regis in Aspen, for example, announced in August that they would sell a 19% stake in the hotel in the form of tokens.

Preston Byrne, a financial consultant and cryptocurrency lawyer, argues that the security tokens will make it easier for businesses 
to raise capital, by streamlining regulatory compliance and record-keeping—as information that currently occupies dozens of disparate files gets consolidated onto blockchains. Tokens could also make companies less reliant on investment banks and other middlemen, slashing the costs associated with mergers, acquisitions, and the issuance of equity or bonds. “Coinbase is in a very good position to leverage all that because they’ve got the tech,” Byrne says. “This is where the rubber hits the road, as tech startups start eating big banks’ business.”

The big banks, of course, may eat before they get eaten. Flush with cash and stocked with their own tech talent, financial monoliths like JPMorgan Chase and Citigroup are funding their own blockchain projects. And Coinbase hardly has a monopoly on crypto- currency trading technology; rivals including Circle and Gemini are also jockeying to build institutional trading platforms.

Still, Coinbase remains an investor favorite. Multiple sources confirmed to Fortune that the company is in the final stages of a hefty funding round. In April, when Coinbase acquired crypto company Earn.com, reports leaked that Coinbase projected its own value at about $8 billion. The company has not confirmed that figure but doesn’t dispute it.

As for the broader cryptocurrency revolution, Armstrong hasn’t lost sight of the ideal of a global payment system independent of banks and governments. To this end, Coinbase is building software called Coinbase Wallet to help ordinary investors navigate the world of tokens. And Armstrong remains even more ambitious than his investors. “I really want to see crypto be used by a billion people in the next five years,” he says.

This article originally appeared in the October 1, 2018 issue of Fortune.

Capital Product Partners: Nearly 12% Yield With Growing Coverage And No K-1

CPLP Overview – 11.5% Yield, Conservative Posture

Image Credit: CPLP, Q2-18 Earnings Presentation

Capital Product Partners LP (NASDAQ:CPLP) is a shipping holding company specializing in vessels with medium and long-term charter contracts, primarily in the product tanker and container sectors. CPLP has superior forward revenue visibility due to the nature of its contracts and staggered roll-offs. This allows it to appeal to more income-focused investors versus direct rate speculators. Despite this strength and a very strong balance sheet, the stock has been trading terribly towards the end of summer 2018.

This report will examine current asset values, cash flow potential and long-term sustainable payout levels. Current NAV is over $4/unit, even with underlying asset values near record lows.

CPLP currently trades at $2.79 with approximately 130 million common units outstanding, for a current market capitalization of just over $360 million. It also has nearly 13 million convertible preferred units (privately held), with a par value and conversion at $9/unit. CPLP common units currently offer a quarterly distribution of $0.08 for a current yield of 11.5%.

Fleet and Employment Overview

CPLP has a fleet of 37 vessels, primarily made up of product tankers and containerships on medium- and long-term charters. The majority of these vessels are on fixed charters to top-tier counter-parties, with current employment shown below.

Source: Capital Product Partners, Q2-18 Presentation, Slide 8

The primary exceptions are its 4 Suezmax crude tankers, of which 3 are on weak spot rates and 1 is on a weaker short-term charter. These weaker rates have been holding back cash flows, but spot rates have recently improved, and I expect significantly better performance by Q4-18.

Fleet Values and Balance Sheet

Although income vehicles are traditionally valued on yield, the underlying asset values are important to intrinsic value. Most high-yield companies have unsustainable payouts backed by weak assets. That’s not the case at CPLP.

We can calculate CPLP’s “intrinsic worth” by figuring out net asset value (“NAV”), which is similar to tangible book value. For shipping firms, this is essentially fleet valuations minus net debt.

According to VesselsValue, our preferred source of live valuations, the current fleet is worth $914 million. Additionally, CPLP has above-market charters (very lucrative charters on 8 containerships and 1 dry bulk vessel), which I value at $208 million using a 10% discount rate to EBITDA, adjusted for vessel depreciation.

Source: VesselsValue, CPLP Fleet Overview

For the liabilities side of the house, as of Q2-18, CPLP reported net debt (6-K, page 2) of roughly $449 million. It also had $117 million in par value of preferred equity. Altogether, the company’s NAV is about $556 million ($1.12 billion in assets minus $566 million in liabilities).

With 129.7 million units outstanding (127.25 million common and 2.44 million GP), current adj. NAV at CPLP is about $4.30/unit, which means the current units trade at a huge 36% discount to intrinsic value. Unlike the vast majority of high-yield plays, CPLP’s yield is simply high due to a weak price, not because of weak assets or unsustainable payouts.

Significant Asset and Yield Upside

CPLP’s current NAV is based on underlying asset values that are near all-time adjusted lows. Sentiment has been terrible after several rough market years, and ship prices reflect this.

If product tanker markets recover substantially by 2020, I anticipate that as earnings increase, the company’s underlying fleet values could surge by $200-300 million and NAV could easily surpass $6/unit. In such a market environment, which I believe is very likely prior to 2020, CPLP’s payout could see significant increases. If an eventual refinancing is achieved, a doubling is possible.

Regulation Tailwind

The IMO 2020 regulations, which limit the use of high-sulfur fuel to a maximum of 0.5%, go into effect in just over 15 months. This new regime will force shipowners to pursue regulation-compliant blends and is poised to add significant demand to the product tanker sector. This is CPLP’s primary exposure, and almost all of its containerships are also on long-term contracts (which means CPLP doesn’t pay for rising fuel costs), so unlike many other shipping companies, its net impact is clearly skewed positive.

On its Q2-18 conference call, Ardmore Shipping (NYSE:ASC), a product tanker peer, shared the following guidance:

… IMO 2020 sulphur regulations are expected to have an impact from mid-2019. The initial estimates suggest that approximately 2 million barrels a day of refined products will display high sulphur fuel oil, with the majority of this moving at sea and over longer distances, with some analysts calling for a 10%-plus increase in product tanker demand.

This surge will likely occur right as CPLP begins to roll over lots of its contracts. It is very possible we could see a surge in DCF, which further strengthens CPLP’s hand towards longer-term deals and potential refinancing.

Stable Results and Long-Term Coverage Capacity

CPLP recently produced steady Q2-18 results, demonstrating strong cash flow even as all other product tanker peers have struggled due to weak spot markets. The company was able to secure strong employment for eight of its product tanker vessels by offering 2-3 year contracts to Petrobras (NYSE:PBR).

Despite arguably strong results, CPLP investors have grown concerned with reported distribution coverage, with the company announcing 1.0x coverage for Q1-18 and 0.9x coverage for Q2-18. The most recent breakdown is shown below. Pay close attention to the line items “capital reserve” and “decrease in recommended reserves.”

Source: Capital Product Partners, Q2-18 Presentation, Slide 5

Why was coverage lower? Suezmax Crude and LIBOR Rise

The primary reason CPLP’s coverage was weaker is due to the very weak Suezmax tanker markets (as noted earlier), where the company has had 4 vessels roll off from $21-26k/day charters into a spot market with Q2 performance around $10k. Three of these vessels are currently operating in the spot markets and 1 vessel is employed with an $18k/day contract.

This impact alone is set to drop cash flow by nearly $4 million a quarter, around 3-4 cents per share. This was slightly offset by a new Aframax dropdown and improved containership rolls, but challenging product tanker markets have left CPLP’s core fleet mostly treading water. The good news is that Suezmax spot rates have stabilized and are set to increase into Q4.

Interest expenses are set to decrease q/q going forward from Q2; however, the y/y comps are difficult because the credit facility is tied to LIBOR, specifically L+325 basis points (3.25%). As the chart below shows, LIBOR shot up in early 2018, but has now stabilized. Assuming $450 million of long-term debt, the increase in LIBOR by roughly 100 basis points (1%) since last year adds nearly $5 million in annual costs, or about 1 cent per quarter.

Source: St. Louis Fed, 3-month LIBOR Chart

The combination of these two negative impacts have been the primary reason why CPLP’s coverage has been reduced. Operating performance has generally been quite strong, but these are difficult markets.

Forward Challenges? Slight Dip in Product Tankers

Product tanker markets are difficult, but medium and long-term charter rates have been mostly stable for the past two years. CPLP has a few challenging forward rolls, such as the 5 product tankers shown below, but with my current market estimate at around $15k/day, we’re looking at roughly a 1 cent impact per quarter, easily offset by just the recent improvements in Suezmax conditions alone.

Source: Capital Product Partners, Q2-18 Presentation, Slide 9

Forward Coverage?

With all of the facts described above, I expect overall reported coverage for both 2018 on average, and most of 2019, to be very close to 1x. The 4 Suezmax crude tankers offer a chance for higher coverage if CPLP can improve those charters. There will also be a natural improvement in reported coverage, as debt loads are reduced and LIBOR rates seem to have plateaued for now.

The rest of the report will discuss how the company’s current reported coverage is incredibly conservative and long-term sustainable levels are actually much higher.

CPLP’s Current Credit Facilities and Repayments

Under its current financing structure, announced in October 2017, and also disclosed in its annual report (20-F, page 92), CPLP must repay $12.9 million per quarter, split into two primary tranches. (Note: Originally it was $13.2 million/qtr, but now it is $12.9 million following the 25th April, 2018, sale of the 2013-built Aristotelis for $29.4 million and the associated $14.4 million debt repayment.)

The full amortization split is also disclosed in its most recent quarterly filings, which shows the impact of these payments.

Source: CPLP Q2-18 SEC Filings, Page 8

As can be seen, the 2015-built “Amor,” the 2016-built “Anikitos” and the 2017-built “Aristaios” each have their own credit facilities of $15.8 million, $15.6 million and $28.3 million respectively. Compared to recent valuations, these three facilities carry leverage of 59%, 56% and 71% respectively, all of which are very typical levels for modern assets. (Note: The Aristaios is on a lucrative 4-year charter, so banks allow slightly higher leverage.)

2017 Credit Facility – Assets and Coverage

Setting those 3 minor facilities aside, we are left with $419 million of debt ($406 million after the July 2018 payment), attached to 34 vessels worth $822 million, and around $200 million worth of above-market charters. Total leverage is a fairly paltry 40%, or a moderate 49% even if charters are excluded.

This facility is split into two parts: Tranche A, covered by 10 modern vessels, and Tranche B, covered by 24 middle-aged vessels.

Tranche A: 54% Leverage, 10 Modern Assets

Tranche A currently carries an estimated $231 million balance and will be repaid through 2023 ($187 million due in 2023). As shown below, the current fleet values for this basket of assets is about $427 million, and leverage is 54%.

Source: VesselsValue, CPLP Fleet Valuations

Tranche B: 44% Leverage, 24 Middle-Aged Assets

Tranche B has an estimated balance of $176 million and will be 100% repaid by Q4-2023 (repaid in 24 equal quarterly installments of $8.4 million). As shown below, the combined fleet valuations are about $395 million. Based on the rigorous amortization schedule, demolition values alone will surpass the corresponding debt by mid-2019, but only one vessel (“Amore Mio”) is even remotely a demolition candidate until at least 2026. This is an unprecedentedly conservative financing facility.

Source: VesselsValue, CPLP Fleet Valuations

Tranche B Amortization: A Major Short-Term Drag

I walked through each of the financing facilities to give a clear fleet picture for CPLP, but the newest 13 vessels all have pretty traditional financing and there’s not much to discuss.

The significant disconnect is related to the 24 older vessels secured by the “Tranche B,” which is so incredibly conservative that demolition values will surpass total debt by April 2019. Based on the current draconian debt paydown structure, CPLP’s core fleet will be entirely debt free by late 2023, but the majority of the fleet has significant life remaining.

A normal expectancy for a product tanker and dry bulk carrier is 20-25 years depending on markets, and containerships should easily do 25-30 years of service. This means that even in heavily bearish outcomes, CPLP doesn’t need to replace much of its fleet until 2026. The sole exception is the 2001-built “Amore Mio,” which is likely to be scrapped in the next few years. This vessel is currently valued at $10.4 million and is likely to generate nearly $10 million from demolition, so there’s virtually no risk here.

Why is this facility a “drag?”

The Tranche B results in distorted reported coverage levels because it forces CPLP to funnel cash to the banks instead of either investing in more growth (dropdowns) or shareholder returns (distributions). Obviously, older vessels need more conservative financing, but to be unable to borrow in excess of demolition levels is more extreme than common sense would dictate.

I believe that once market levels stabilize, rates improve and CPLP locks many of these vessels on medium-term and long-term employment, there is a clear path to a refinancing that could easily result in a $100 million or larger cash-out. Unfortunately, in 2017, spot rates were terrible and the company wasn’t bargaining from a position of strength, so it got stuck with this stinker for now…

If rates improve in 2019-2020, I expect CPLP will be able to easily secured an enhanced financing deal with both lower amortization and a higher overall balance (i.e., enough to pull fresh cash out).

Credit Facilities vs. Long-Term Coverage

Recall earlier, when I highlighted CPLP’s sort of odd distribution coverage chart. We’re now going to dive into the calculations and illustrate how the company is presenting overly conservative numbers, effectively sandbagging its own results.

“Capital Reserve” – What is This?

Virtually every other MLP or LP structure utilizes line items called “maintenance capital reserves” and “replacement capital expenditure reserves.” They are often combined into one line. This is how KNOT Offshore Partners (NYSE:KNOP), Hoegh LNG Partners (NYSE:HMLP), GasLog Partners (NYSE:GLOP), Golar LNG Partners (NASDAQ:GMLP) and Dynagas LNG Partners (NYSE:DLNG) all report their results.

These levels are based on calculations describing what it costs to maintain and what it costs to replace assets down the road. Maintenance is relatively simple: it comes down primarily to drydocking and special surveys. Replacement is the annual allotment required for CPLP or others to set aside to buy a new product tanker in 25 years, a new containership in 30 years, etc.

CPLP does something different: the company reports real-time bank amortization, presenting a sort of “free cash flow” instead of “distributable cash flow.” The difference might appear subtle or meaningless, but it makes a legitimate huge long-term difference. DCF should, in theory, showcase exactly what is a sustainable long-term payout level. Whereas CPLP’s method of FCF only shows what is payable based on that exact quarter of results and debt structure.

Current bank amortization shouldn’t be relevant to long-term DCF. Otherwise, a company can simply buy modern assets, sign a goofy financing deal with almost zero upfront debt payments, and then tout a blatantly bloated number as its DCF. Conversely, if bank amortization is draconian, the reported DCF is sandbagged, because it under-reports the true long-term payout potential. Simply put, CPLP reports these coverage metrics differently than virtually every single peer out there.

In the long term, I believe this is because the company is hopeful it can refinance down the road and secure enough “friendly” bank facilities that its DCF and coverage ratios will soar; however, in the immediate term, the net result is that CPLP drastically under-reports its DCF compared to peers.

“Decrease in Recommended Reserves” – What is This?

When CPLP reports an amount here, it is showing the cost of the distribution in excess of quarterly generated cash flow. Therefore, the company was $1.5 million short during Q2-18. Its immediate FCF supported a 7 cent payout, whereas 1 cent came straight off balance sheet cash.

CPLP had $51 million in cash as of 30th June, so a $1.5 million draw is almost insignificant, but it’s still worth keeping an eye on. Bearish folks would point to this as a major weakness of CPLP, but what these folks are ignoring is the massive underlying asset values and conservative debt structures.

“True DCF”

Without full access to CPLP’s internal calculations, it is difficult to calculate a 100% accurate “correct DCF,” but if we utilize a 20-year replacement curve for crude tankers (4x Suezmax – $55 million, 1x Aframax – $45 million), a 25-year replacement curve for bulkers (1x Capesize – $45 million), 25-year for product tankers (6x MR1 – $30 million, 15x MR2 – $35 million) and a 30-year replacement curve for containers (10x – $50-80 million), then we come up with a replacement valuation of nearly $1.7 billion, or about $1.4 billion net of demolition recoveries.

I’ve designed a spreadsheet that calculates each vessel’s annual replacement reserve against the above inputs, and we reach a required replacement reserve of $54 million. However, this is an overly simplistic calculation which does not discount back for retained fund investment.

Investment of Retained Funds

When you keep a replacement reserve, these funds are not simply stuck on a shelf or hidden in a mattress. They are instead continually invested into new assets. MLPs must use a calculation for the expectation of investment returns beyond general inflation – a general benchmark is to use a 5% annual return placeholder.

When we utilize this same system for CPLP, we reach an annual requirement of $24.5 million in retained funds. Therefore, the “true” replacement reserve calculation is about $6.1 million per quarter.

What About Maintenance Reserves?

This is an important calculation as well. CPLP must include a reserve to fund dry docks, special surveys and regulation compliance (i.e., ballast water treatment). These requirements differ by asset type, but I estimate them to range from about $200k/year for the smallest MR1 assets to about $500k/year for the larger tankers and containerships. Using these assumptions, the company must retain close to $12 million per year. Therefore, the “true” maintenance reserve calculation is about $2.9 million per quarter.

Bringing Them Together – Adjusted Coverage Ratio (1.26x)

When these two buckets are combined ($6.1 million replacement reserve + $2.9 million maintenance reserve), we realize CPLP needs to retain about $9 million per quarter, which is significantly less than the $13.2 million currently earmarked for “capital reserve.” Altogether, this means its long-run DCF capacity is at least $0.03/qtr higher than currently suggested.

Source: Capital Product Partners, Q2-18 Presentation, Edits by Author

Downside Risk?

CPLP is inherently safer than most of its peers due to the strong NAV levels and contract fixtures; however, the company isn’t totally immune from a prolonged market downturn. If the current trade war concerns lead to a major global slowdown or recession, CPLP’s fleet values would likely drop by at least another 10-20%.

As product tankers contracts roll off into this potential weaker market, DCF would also drop, and in the absolute worst case, $0.08/qtr might not be covered in the short term. To model such an impact, we need to consider what happens to fleet values with a 20% haircut, which would reduce NAV by around $183 million ($914 million down to $731 million). That’s a haircut of about $1.40 per units, which brings CPLP’s NAV down from $4.30 to $2.90.

If we add another 25% discount onto the $2.90 NAV to account for market uncertainty and general pessimism, that gets us to about $2.20, which is what I would use as a bear-case terrible market target.

Conclusion: Solid Long-Term DCF and Underlying Value

We’ve approached CPLP both from long-term yield potential and underlying asset values. Our yield analysis shows that the current annual payout of $0.32 is covered by nearly 1.3x under current market conditions, leading to a current DCF yield of nearly 15%. Obviously if market conditions improve, I expect this number to increase significantly.

Our value-based analysis demonstrates that CPLP is worth about $4.30, which is substantially higher than the current pricing. In a full bear scenario, our target price is about $2.20, based off a projected NAV of $2.90. Therefore, we see over 50% upside potential versus about 20% of downside risk.

Bottom line: CPLP is cheap, the balance sheets and payouts are conservative, and I believe there’s around 50% upside potential to base-case markets. My target price is $4.30, which is based on current NAV.

J Mintzmyer collaborates with James Catlin and Michael Boyd on his Marketplace service.

We’re currently working on our quarterly income review, which covers over 50 opportunities including partnerships, preferred equities, and bonds. Please consider joining the discussion at Value Investor’s Edge. Send a private message at any time for more info. I look forward to sharing new ideas soon!

Disclosure: I am/we are long CPLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Avoid the Perils of Overpromising

Promises always come with the peril of non-performance. It’s a bad plan in life as well as business to promise more than you can deliver. If you expect people to believe your promises tomorrow, it helps a great deal if you kept them yesterday. This probably sounds like old news to most of you since we’ve all been lectured from birth by our parents, teachers and preachers about the necessity and difficulty of always trying to live up to your commitments.

But this is how life works. I certainly support the basic concept and agree that it makes all the sense in the world, but the difference today is that technological advances have radically changed the nature of the conversation.  The problem now isn’t so much about arrogance or baseless bragging as it is about how and when to deal realistically and effectively with the truth. Because the truth today is a lot stranger in some ways than the fiction of yesterday.  

Given the powerful technologies we now have at our disposal and the actual and concrete results that new businesses can deliver, there’s a somewhat novel sales problem that I’m seeing. Too many startups are so excited about the powerful possibilities and the real wonders their solutions can work that, in their eagerness and enthusiasm, they’re losing sight of who they’re selling to, and what kinds of solutions those buyers are looking for.

In the old days, we used to say that the main difference between a car salesman and a computer salesman was that the car guy knew he was lying to you whereas the computer guy was just deluded. Today, telling your prospects and customers too much about what your products and services can do is more likely to confuse them than to convince them.

Instead of offering simple initial implementations and step-by-step measured solutions –basically addressing and resolving the lowest and most obvious hanging fruit first– what I’m seeing and hearing too often in these kinds of conversations are broad claims and bold statements.  “Our software can do anything – just tell us what you need.” Even if that were true, which in some cases is almost certainly the case, it absolutely doesn’t matter to the buyers.  And, worse yet, it’s totally off-putting because it shifts the onus of specifying the problems that need to be solved on to the buyers.  Here’s the issue: they may know what end results they need (cost economies, productivity enhancements, etc.), but they likely have no real idea of what your products can do or how your solutions would be introduced and incorporated into their specific operations. So, their natural reaction is to take two steps backwards rather than buying your pitch.

That’s why it makes so much sense to start by sandbagging a little bit instead of bragging. Under promise and then over deliver. Let me give you a real life and slightly sneaky example that you’ll be seeing practically every night on TV – if you ever watch TV. I say “sneaky” because this is a situation dictated mainly by marketing considerations, but it might also be to get around certain regulatory requirements about diet claims. If you watch the latest ads for several of the wonder drugs (no names please)– after they make all the over-the-top basic benefit claims and after they list the 4 million side effects – you’ll hear a little announcer aside that goes like this: “and you might just lose a little weight too.” No promises. No guarantees. But, as good Samaritans, we thought you just might want to know. Right. That’s under promising to a “T.”

And, in your own business and sales approach, you need to be thinking the same way when you present your new products and services. Tone it down – don’t go for the gold from the get-go. Prove your product a little bit at a time.  “New” is a nasty word to millions of procurement officers, buyers and other decision makers. “Novel” and “innovative” are right up there as well. Change is always hard to implement, but when it represents new costs, retraining and upskilling commitments, the risks of errors and mistakes, etc., it’s an even harder sale. And it’s no easier when the impact and the benefits aren’t immediately demonstrable.

In the real world, no one is looking for a miracle. They want risk-free, middle-of-the-road, mundane improvements that might save their companies some money, but will certainly save their jobs. They want immediate solutions, not ultimate salvation. This is in part because they’re not sure that they’ll even be around for the big, long-awaited payoff. So you need to plan, sell, and act accordingly.

Even if you can eventually move the moon, start with something that you can get done by next Monday.

The Post-It Note System To Achieve Your Dreams

Is there really something to the notion that, if we hold a thought in our mind over time, we can eventually, almost magically, bring it to life? This has been called the “Law of Attraction” and people like the author Richard Bach and his book, Illusions, which helped popularize it.

There is certainly something to this idea, but it isn’t magic.  And it actually predated Richard Bach, going back as far as Think and Grow Rich by Napoleon Hill.

The way it really works is that we are constantly making decisions in our lives, day in and day out, about how to spend our time and energy. When something is top of mind for us–when the thought is always right there–you will inevitably make decisions that bring you closer to making that thought a reality. No matter what you might want to achieve–a happy marriage, losing weight, more money in the bank, or running a PR in a marathon–the more you think about that thing, the closer you come to achieving it, because every little decision you make is in the right direction.

This approach is incredibly powerful and I’m happy to share a simple trick I learned from my friend Dave Lindsey, Founder of Defenders, to help you harness this power and help achieve your dreams.

Goal setting with Post-It Notes

Go to your desk and open the drawer. Chances are you might have an unused stack of Post-It Notes in there. If not, go out to our local office supply store and buy a pack. Take care of them because they can help make your dreams come true.

To do that, make a list of the three to five big goals you want to achieve. While I’ve seen people have lists of goals that stretch to more than 20 items, I encourage you to stick to a manageable number. Now the key is that they are specific and based in time.  While the picture above says lose weight, a better goal is lose 20 pounds by the end of the year.

Write each of those goals down on Post-It Notes and then, when you get home, stick each of them to your bathroom mirror.  So, three goals means three Post-It notes.

Now, every day when you wake up and right before you go to bed, you’ll be staring at those three to give goals–which will keep them at the top of your mind and help you make decisions to bring you closer to achieving them.

After you wake up, for instance, and brush your teeth, you’ll already be thinking about what you need to do that day to make progress toward your goals. Then, later on at night, you will think about what you did that day–and what you can do tomorrow–to keep making progress.

You’ll be absolutely amazed at how effective you’ll become at chasing down your dreams. And I would wager that you will accomplish at least a few of them in less than 12 months.  There is nothing like the feeling of accomplishment when you peel off a Post-It note from you mirror because you have achieved a long-term goal.

And you don’t have to believe just me: there are thousands of people who will vouch for this technique in helping them achieve their goals and change their lives. All thanks to a few simple Post-It Notes.

So what do you have to lose? Grab some Post-It notes and make today the first day in your journey to making your dreams–no matter what they are–come true.

The night a Chinese billionaire was accused of rape in Minnesota

MINNEAPOLIS/NEW YORK (Reuters) – With the Chinese billionaire Richard Liu at her Minneapolis area apartment, a 21-year-old University of Minnesota student sent a WeChat message to a friend in the middle of the night. She wrote that Liu had forced her to have sex with him.

JD.com founder Richard Liu, also known as Qiang Dong Liu, is pictured in this undated handout photo released by Hennepin County Sheriff’s Office, obtained by Reuters September 23, 2018. Hennepin County Sheriff’s Office/Handout via REUTERS

“I was not willing,” she wrote in Chinese on the messaging application around 2 a.m. on August 31. “Tomorrow I will think of a way to escape,” she wrote, as she begged the friend not to call police.

“He will suppress it,” she wrote, referring to Liu. “You underestimate his power.”

This WeChat exchange and another one reviewed by Reuters have not been previously reported. One of the woman’s lawyers, Wil Florin, verified that the text messages came from her.

Liu, the founder of Chinese ecommerce giant JD.com Inc, was arrested later that day on suspicion of rape, according to a police report. He was released without being charged and has denied any wrongdoing through a lawyer. He has since returned to China and has pledged to cooperate with Minneapolis police.

Jill Brisbois, a lawyer for Liu, said he maintains his innocence and has cooperated fully with the investigation.

“These allegations are inconsistent with evidence that we hope will be disclosed to the public once the case is closed,” Brisbois wrote in an email response to detailed questions from Reuters.

Loretta Chao, a spokeswoman for JD.com, said that when more information becomes available, “it will become apparent that the information in this note doesn’t tell the full story.” She was responding to detailed questions from Reuters laying out the allegations in the woman’s WeChat messages and other findings.

Florin Roebig and Hang & Associates, the law firms representing the woman, said in an email that their client had “fully cooperated” with police and was also prepared to assist prosecutors. Florin, asked if his client planned to file a civil suit against Liu, said, “Our legal intentions with regard to Mr. Liu and others will be revealed at the appropriate time.”

Representatives for both Liu and the student declined requests from Reuters to interview their clients.

The police department has turned over the findings of its initial investigation into the matter to local prosecutors for a decision on whether to bring charges against Liu. There is no deadline for making that decision, according to the Hennepin County Attorney’s Office.

The Minneapolis police and the county attorney declined to comment on detailed questions from Reuters.

Reuters has not been able to determine the identity of the woman, which has not been made public. But her WeChat messages to two friends, and interviews with half a dozen people with knowledge of the events that unfolded over a two-day period provide new information about the interactions between Liu and the woman, a student from China attending the University.

The case has drawn intense scrutiny globally and in China, where the tycoon, also known as Liu Qiangdong, is celebrated for his rags-to-riches story. Liu, 45, is married to Zhang Zetian, described by Chinese media as 24-years old, who has become a celebrity in China and works to promote JD.com.

As the second-largest ecommerce website in the country after Alibaba Group Holding Ltd, the company has attracted investors such as Walmart Inc, Alphabet Inc’s Google and China’s Tencent Holdings.

Liu holds nearly 80 percent of the voting rights in JD.com. Shares in the company have fallen about 15 percent since Liu’s arrest and are down about 36 percent for the year.

“IT WAS A TRAP”

Liu was in Minneapolis briefly to attend a business doctoral program run jointly by the University of Minnesota’s Carlson School of Management and China’s elite Tsinghua University, according to the University of Minnesota. The doctoral program is “directed at high-level executives” from China.

Liu threw a dinner party on August 30 for about two dozen people, including around 20 men, at Origami Uptown, a Japanese restaurant in Minneapolis where wine, sake and beer flowed freely, according to restaurant staff and closed circuit video footage reviewed by Reuters.

Liu, who Forbes estimates is worth about $6.7 billion, ordered sashimi by pointing his finger at the first item on the menu and sweeping it all the way down to indicate he wanted everything, one restaurant employee said. The group brought in at least one case of wine from an outside liquor store to drink along with the dinner, according to the restaurant staff.

JD.com founder Richard Liu, also known as Qiang Dong Liu, is pictured in this undated handout photo released by Hennepin County Sheriff’s Office, obtained by Reuters September 23, 2018. Hennepin County Sheriff’s Office/Handout via REUTERS

Security video footage from the restaurant shows the group toasted each other throughout the night.

Later the woman told a second friend in one of the messages that she felt pressured to drink that evening.

“It was a trap,” she wrote, later adding “I was really drunk.”

The party ended around 9:30 p.m. The tab: $2,200, the receipt shows. One inebriated guest was helped out of the restaurant by three of his associates, according to the restaurant security video footage.

Liu and the woman then headed to a house in Minneapolis, according to one person familiar with the matter. Another source said that the house had been rented by one of Liu’s classmates in the academic program to give the class a place to network, smoke, drink whiskey and have Chinese food every night.

But they did not go in. Liu and the student were seen outside the house before Liu pulled her into his hired car, a person with knowledge of the incident said.

In the WeChat message to one of her friends sent hours later, the student said Liu “started to touch me in the car.”

“Then I begged him not to… but he did not listen,” she wrote.

They ended up back at her apartment, according to sources with knowledge of the matter.

Reuters could not determine what happened over the next two hours. According to the police report, the alleged rape occurred at around 1 a.m.

The woman subsequently reached a fellow University of Minnesota student who notified the police, according to two sources and her WeChat messages.

Minneapolis police came to her apartment early that morning while Liu was there, but made no arrests, another source familiar with the situation said. Reuters could not determine exactly what occurred during the police visit, but the source said the woman declined to press charges in Liu’s presence.

In a WeChat message with one of her friends, she asked her friend why the billionaire would be interested in “an ordinary girl” like her.

“If it was just me, I could commit suicide immediately,” she wrote. “But I’m afraid that my parents will suffer.”

By Friday morning, she also wrote to one of her two friends that she had told several people about what had happened, including the police, a few friends and at least one teacher. She wrote that she would keep her bed sheets. “Evidence cannot be thrown away,” she wrote.

On Friday afternoon, the student went to a hospital to have a sexual assault forensic test, the source said.

Police officers arrived at a University of Minnesota office shortly after an emergency call around 9 p.m that night. The student was present at the office, alongside school representatives, and accused Liu of rape, the source said.

Representatives for the University of Minnesota declined to comment on detailed questions from Reuters.

Liu came to the university office around 11 p.m. while police were there, according to the person familiar with the matter. As an officer handcuffed him, Liu showed no emotion. “I need an interpreter,” he said, according to the source.

Liu was released about 17 hours later. Minneapolis police have said previously that they can only hold a person without charges for 36 hours.  

Within days, Liu was back in China, which has no extradition treaty with the United States.

“Liu has returned to work in Beijing and he continues to lead the company. There is no interruption to JD.com’s day-to-day business operations,” Loretta Chao, the JD.com spokeswoman, told Reuters.

Additional reporting by Blake Morrison and Christine Chan in New York, Adam Jourdan and Engen Tham in Shanghai, and Cate Cadell in Beijing; Editing by Paritosh Bansal and Edward Tobin