Why You’re Not Getting Kickstarter Backers

There are plenty of people out there with disposable income. About 30% of Americans have a discretionary income of at least $21,000 per year.

The higher the income bracket, the more people have to spend on things outside their needs. Now, some of this money does have to go into savings. But much of it goes to movies, furniture, and other fun things.

Yet, as someone who wants their Kickstarter campaign funded, you’re seeing none of that money. Of course, it’s not like you have a right to it. But you’re wondering why nobody is spending money on your campaign.

You wonder where the problem lies. Is your idea not good enough? Are your incentives lame? What gives?

I’m here to tell you that you’re wasting your efforts. That’s right.

But I’m also here to tell you how to start maximizing your efforts. What? Let’s examine what I mean.

1. The 80/20 Rule

If you’re a seasoned marketer, you’re probably rolling your eyes right now. The 80/20 rule aka. the Pareto principle is something we all understand, right?

But the question is, do we all implement it?

What is the 80/20 rule? It basically states that 80% of your outcome usually comes from 20% of your efforts. Therefore, you should focus on the 20% that gives you that 80%.

But the eternal question is, how do you divine what 20% is effective? In essence, how do you trim the fat?

Ask yourself this question: who do you think will back your Kickstarter?

If you can’t even answer this question and you’re marketing with broad strokes, no wonder you have no backers! You’ve started a business without doing the proper research.

And, yes, you must look at your Kickstarter campaign as a business. A good business always starts with market research.

Rework the Sales Funnel Approach

One of the best ways to gauge interest and build a marketing pool is to build a “sales funnel.” Now, you’re not selling anything yet, so it can’t really be called a sales funnel. But we’ll use the same principles.

If you’re unfamiliar with a sales funnel approach, here’s how it works:

You want to turn leads into potential backers. And you want to sort serious backers from lukewarm backers (thinking the 80/20 rule here).

Start With a Landing Page

On your landing page, you give a little info on your product or service. Then you ask if someone would like more information about backing your future campaign. Then give them the option of receiving said info through an email.

All Superscreen had on their website before launching was this kind of information. And you can see for yourself that they’re a successful business.

A PPC Campaign

Next, you need to start an advertising campaign. The best way to get your idea in front of potential backers is through a PPC campaign.

Craft a great ad that includes a link to your landing page.


Lastly, create a video or a presentation you can send out in an email to your leads. In the video, give all the details of both your product and your campaign.

Below the video embedded in your email, ask for a commitment. Ask if they would join a special email list that gives a special incentive to back your project.

You can choose something small, a token or a patch, but these will be your super backers. Treat them well.

2. Remember, Failure IS an Option (And It’s Likely to Happen)

Alright, this isn’t a popular thought. But it’s true.

A failed Kickstarter definitely doesn’t mean a failed business idea. Only 36% of Kickstarter campaigns succeed. So, it’s wise to figure out a use for your campaign outside of funding.

If you’re selling a product, you will want feedback. And who else is better than a group of people already excited about your product?

They’ll be your core market anyways.

Even if you can’t make your Kickstarter goal, you create a community throughout your campaign. Your most ardent supporters will want to connect with each other.

A Facebook Group

If you know how to crowdfund using recent trends, you will have already started a Kickstarter Facebook group for your campaign. It’s only good form.

But in the group, start encouraging potential backers to give you ideas on how to improve your product. The more backers feel involved in a campaign and in product development, the more they will be willing to spread the word.

I can tell you from my experience outside of Kickstarter campaigns (mostly with Beta testing for Virtual Reality games), inclusion in the process is a powerful motivator. It motivates people to spend money and it motivates them to spend time giving valuable feedback.

Even if you don’t make your goal, you’ve created a loyal audience. And that’s before you’ve even launched a product! Even established brands would be jealous.

3. Research Could Open Up the Flood Gates

Just like in real life, it’s all about who you know. And if you’ve identified your super backers, then there might be someone worth knowing among them.

Be on the lookout. Open your ears.

Not only will your backers love to criticise your product and make it better, they might think of new ways to use it.

This will open up new marketing avenues. You may even find a whole new market for your product or service.

Also, you might find that someone among your super backers could be an asset to your team. While you might not be hiring new people yet, you could see the talent to nab once your product or service takes off.

It’s All About Focus

The 80/20 rule, the sales funnel approach, a Facebook group…all of these have one thing in common. They shift the focus away from you and your product and toward your backers.

Kickstarter campaigns have a nasty reputation for not delivering on promises. And for this reason, a lot of people are hesitant to back projects or report on them.

If you can show your potential backers that they are the center of your attention, you’ll more than likely succeed. You can at least get them on board for your future success.

If you want to learn more about what it means to be a successful entrepreneur, check out Shoemoney’s story.

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There are pros and cons to everywhere

Kim and I moved to our new home in West Linn on July 1st. Although we’re only 8.5 miles (and about twenty minutes) from the condo we owned in Portland, I haven’t been back to our former neighborhood since we moved. Yesterday, I decided to spend a few hours hanging out at some of my old haunts.

I stopped at the “pot shop” to pick up some sleeping aids. I bought Tally new chew sticks from the pet store. I spent half an hour browsing at the used book store for sci-fi classics. And I stopped to drink a glass of wine at the bottle shop. It was fun to be back in Sellwood once again, if only for a few hours.

While I was sipping my pinot noir, a friend came in. “It’s good to see you,” she said. “How’s life in the new house? Do you miss Sellwood?”

“We do and we don’t,” I said.

“What do you mean?” she asked.

“Well, there are pros and cons to every location, right? I don’t think there’s any one perfect place to live. I miss this wine bar, for instance, and being able to walk to all of the different restaurants. But I don’t miss the traffic and the crowding and the high cost of living.”

“Yeah, I can see that,” my friend said. “But I couldn’t live where you do. I don’t like to drive. I gave up my license three years ago, and I never want to get it back. I like being able to walk for everything.” She has a perfectly valid point.

Driving home, I thought more about our conversation, about the differences between where we live now and where we lived six months ago.

Our new home

Pros and Cons to Everywhere

As an adult, I’ve had six different homes in 25 years: the small house in the small town, where Kris and I moved after we got married; the big house in Portland that she and I bought in 2004; the apartment in downtown Portland that I rented after our divorce; the riverfront condo I bought in 2013; the condo that Kim and I rented in Savannah, Georgia; and now this cottage on an acre of land outside West Linn.

I’ve loved aspects of each of these places — but there have also been things I’ve disliked about each location.

Here, for example, are the pros and cons of living in the condo:

  • Advantages of the condo. Extremely walkable neighborhood. Extensive parks nearby. Great view of river and city. Direct access to city-wide bike path. Close to public transit. Lots of people to hang out with. Condo maintenance was generally hassle-free.
  • Disadvantages of the condo. Dense vehicle traffic — even on weekends. Large vagrant population, including chronic drug use and increasing property crime. Expensive grocery stores. High fixed costs (HOA, property taxes) even though condo was owned free and clear. No place for pets to roam. Way too easy to opt for restaurants instead of eating in. At 1560 square feet, the condo felt too large. Too many people all around.

Looking at that list of pros, it’s clear that the best part of living in Sellwood was its proximity to everything. The two biggest downsides were the high cost of living and the population density.

I made a similar list of pros and cons for our current house:

  • Advantages of the country cottage. Beautiful park-like setting just 25 minutes from Portland. Quiet yard and neighborhood. No issues from population density (traffic, homelessness). Fixed costs are much lower; so are discretionary costs. Room for animals to roam. At 1235 square feet, the house is smaller than the condo and feels more “livable”. Nearby multi-use trail. Kim and I both love the vibe of the home and property; this place feels like home to us.
  • Disadvantages of the country cottage. Relatively isolated so little interaction with other people. Neighborhood isn’t walkable for errands. (It’s plenty walkable for pleasure and exercise.) No quick access to public transportation. House has required extensive renovation, and there’s still more that needs to be done. Severe rodent infestation.

The two biggest advantages of living in West Linn are the lower costs and the increased connection with nature. The trade-off, however, is that we’re farther from conveniences like grocery stores, gyms, and restaurants. We drive more often.

Everything Is a Trade-Off

The older I get, the more I believe that the ideal home doesn’t exist. Not for me, anyhow. And not for Kim.

“You know what I wish?” Kim said a couple of weeks ago. “I wish that we had this house and this property but that it was located in our old neighborhood. That’d be perfect. We could still walk everywhere and do everything, but then we’d have an oasis to come home to.”

Right. That would be awesome — but I’m still not sure it would be perfect. And it doesn’t exist. If it did exist, it would cost a fortune.

Everything is a trade-off. If you want land, you have to look outside of the city, which means you’re not going to be in a walkable neighborhood. If you want a place with low maintenance, you’re probably going to be in an HOA (for both better and worse). If you want someplace inexpensive, you’ll likely be located farther from amenities.

When choosing a place to live — or making any big life decision, really — it’s important to ask yourself two questions:

  • What am I giving up by making this choice? What am I sacrificing? What am I gaining? Are the compromises worth it?
  • What else could I do with the same time and money? Are there options that appeal to me more?

Kim and I decided that at this stage in our lives, we didn’t need the easy access to bars and restaurants. We wanted a place where the animals could explore the outdoors, and a place where we could save money. We’re happy with our country cottage despite the constant construction and the ongoing rodent infestation.

What kinds of compromises have you made to live where you live? What did you give up? What did you gain? If you could design a perfect home and neighborhood, what would it look like?

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How to Automate Your Passive Income

What if you could make money without even lifting a finger? We call passive income “passive” but we all know it’s not truly and absolutely passive.

There will always be some work involved, right? But what if there were a way to make your passive income actually passive? Would you do it?

Today we’re going to talk about how it’s possible to completely automate your passive income.

1. Wait, How Can Income Be Passive?

Most people trade hours for dollars. Even when creating a product, most people value their product by the time and effort put in to build it.

But passive income is a completely different mindset. You’re no longer trading hours for dollars, you’re trading value for dollars. And you’re doing it in your sleep.

The goal is to make enough money to fund your life or supplement your income without having to remain on the mouse wheel. It’s the mouse inventing a motor that runs the wheel for them.

2. Enter Affiliate Marketing

Affiliate marketing is one of the easiest ways to generate passive or almost passive income. What is affiliate marketing?

Affiliate marketing is essentially cheap advertising for productized businesses. A business will give an affiliate marketer a percentage of a sale if the marketer can get someone to buy the product.

It’s as simple as dangling a product link in front of the eyes of potential leads and customers. But most of the time it requires some sort of packaging. This could include a blog or an email or a podcast or video.

3. Affiliate Marketing Through E-mail for Passive Income

While some affiliate programs will require a website to even open an affiliate account (I’m looking at you, Amazon), others do not. And if you find an affiliate that does not care, you’re on your way to automated passive income.

E-mail is an easy thing to automate. Even the content can be outsourced.

It can be a completely laissez-faire experience.

But let’s forget about passive income for a minute and talk about pure return on investment. Even if you aren’t looking for passive income and want to start your own business, email marketing is highly influential.

How does 320% more revenue sound? Email marketing can up your revenue by exactly that much. And it’s less work than most outbound marketing techniques.

4. How to Build an E-Mail List

Before you even begin automation, you need to figure out how to accumulate email addresses. One of the easiest ways to do this is through a sales funnel.

This is a simple two-step sales funnel, but it will absolutely work to start building a list for your e-mail marketing efforts.

A Website

First, build a simple website. It only has to be one page. A landing page.

On the landing page, you promise some sort of benefit for signing up for the email list. This could be a short e-book or some sort of promotion for your affiliate program. But it has to be interesting enough to bait people into giving you their email and signing up for your list.

One thing you could do if your affiliate program is small enough: write the head of your affiliate to see if they would allow you to run a giveaway. They might even give you their product or a gift certificate, at least.


Once you have a website, you run a short but sweet PPC campaign. Advertise the benefit of signing up for your email list.

Read up on how to create a great PPC campaign. It involves running a couple of pay-per-click ads and writing stellar headlines.

5. How to Automate Your E-Mail List

After you have an e-mail list, it’s time to start sending out emails. But remember, the dream is to pretty much do nearly zero work to gain the income.

This means outsourcing as much as you possibly can.

Find an e-mail marketing automation company. These services are simple and easy.

We’ll use MailChimp for this, but there are other e-mail marketing services you can use.

Set up an Account

It’s free to sign up for most of these. But if you want more bells and whistles, you can pay for their packages.

MailChimp features great tutorials with their free account to help get you started. And it’s web-based, so you don’t have to download any software to get started.

Add to Your List

This is where that subscriber list you’ve accumulated through your website and PPC campaign come in handy.

You can set up as many lists as you need and keep growing your list here.

If you already have a list created, make sure it’s in a CSV file. Otherwise, you can connect your website page to MailChimp to make it easier to build your list.

And if you were already using a different email program before, it’s easy to transfer your entire list without requiring recipients to re-subscribe.

You can target certain people by splitting your list into segments. And you want to make sure you name your lists so you don’t lose track.

A Sign-up Form

If you hadn’t set up a landing page yet, MailChimp can help you do this. They allow you to create sign-up forms and place them on your website.

In MailChimp, you’ll find the “sign up forms” option in the editing menu for your list. This form should be fairly basic. People don’t like to give away too much information.

Set up a Newsletter

This might be something you could outsource down the road. Or you can outsource it immediately for completely passive income.

This is where you will place your affiliate links. But the newsletter should not be about the links.

You have to offer something of value to your subscribers. This means whole pieces of content and advice.

You can embed videos in emails or podcasts. But they need a reason to open the email. You’ll make zero income if you just send random links to people.

In MailChimp, you can automate your newsletters. Spend some time at the beginning of each month or quarter crafting all of your emails. And then set MailChimp to send out an email every week or every day.

Free Your Time

Automating your affiliate marketing efforts will open up your free time. You’ll have time for the important things in life.

If you want to learn more about affiliate marketing check out our other articles on Shoemoney.com.

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Earning millions of air miles by renting a new car every day

J.J. and the Hertz staff

I’m relatively new to the world of travel hacking, the practice of accumulating credit-card miles and points to get free flights, hotels, car rentals, and more.

That said, I know many folks who consider travel hacking a hobby, and use their skills to earn big rewards. It’s fun to listen to stories of the crazy things they sometimes do to earn points!

Yesterday, The Points Guy featured the story of J.J. Todd, the man who has earned 1.2 million United Miles since April by renting cars:

J.J. has been renting cars full-time since 2012. His car at the time broke down, and after completing a few calculations, he realized renting cars and earning airline miles with each rental would make more financial sense than owning a car.

When he learned that United and Hertz were teaming up for a bonus miles offer, J.J. sat down and did some math. He discovered that by renting a new car every day, he could buy miles at ~0.5 cents each, which is about 25% the value he places on them. He approached the staff of the rental agency to let them know his plans. With their blessing, he’s been stockpiling points while driving a different car every day.

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Dave Ramsey’s top 10 calls of 2017

Dave Ramsey sometimes takes a lot of heat. His assumptions on investing are, well, questionable. Plus, there are people who take issue with his version of the debt snowball, which focuses on repaying low balances first instead of high interest rates.

Quibbles aside, there can be no doubt that Dave Ramsey does a lot of good in this world. (His book The Total Money Makeover that helped me get out of debt a decade ago.)

I don’t listen to Ramsey’s radio show, but I took the time to view this 73-minute video clip featuring the top 10 calls from 2017.

Callers in this video include a couple who has $158,000 in debt but hasn’t paid their bills in six years, another couple with almost $700,000 in student loans, and a third couple who is homeless because of haphazard financial decisions.

Watching Ramsey patiently guide lost listeners through the dense jungle of financial failure is inspiring. I couldn’t do it. Even though I’ve done lots of dumb things with money myself, I’d get frustrated dealing with call after call after call from people who have made such poor choices. But Ramsey remains calm, patient, and interested.

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A comprehensive guide to certified pre-owned vehicle programs

Kim and I have been talking a lot about cars during the past few months.

She drives a 1996 Honda Accord with 226,000 miles on it. The car runs fine and has served her well, but she’s begun to think about the possibility of upgrading.

I still drive my beloved 2004 Mini Cooper, but the little guy has had some issues lately. (Right now, it’s in the shop because the clutch burned out. In the process of replacing that, the mechanic discovered that the transmission needed to be replaced — thanks to towing the car behind our RV for 15 months.)

To top it all off, since we moved to our new place in July, we’ve come to the realization that we might need a cheap compact pickup truck. (If we bought one, we’d buy a beater.)

Neither one of us is ready to make a move yet. We both believe that you should drive a car until it dies. (Although once I get the bill for the repairs to my Mini, I may be singing a different tune.) Still, it doesn’t hurt to gather resources while we wait.

Earlier this week, for instance, Automotive News released a comprehensive Guide to Certified Pre-Owned Vehicle Programs. This 12-page PDF [1.7mb] includes a run-down of dealer fees, the types of vehicles that qualify, and — most importantly — warranty details.

Preowned Mini Program Details

I have mixed feelings (and experiences) about buying a used car from a dealership. Buying a certified pre-owned vehicle would allay some of my concerns.

[via Jalopnik]

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How warehouse stores make money

Last week, I listened to an old episode of NPR’s Planet Money podcast. In this 15-minute installment about “anti-stores”, the hosts look at businesses like Price Club and Costco. What makes them different? How have they succeeded by re-writing the rules of retail?

“It used to be if you ran a store, you wanted to make it easy for your customers,” the hosts say during the intro. “PriceClub and Costco went in the opposite direction. They made shopping harder.” Yet, it worked. “Today, Costco alone sells more stuff every year than Amazon — by far.”

How Warehouse Stores Make Money

Here are some examples of how warehouse stores go against conventional wisdom:

  • When you join a warehouse club, you pay a membership fee. It’s not much — maybe $40 or $50 per year — but it’s something, and it puts you in the hole from the start. You feel motivated to spend in order to recoup your “investment”.
  • Regular retail stores have signage to help customers find what they need. Warehouse stores, on the other hand, intentionally do away with signs because it encourages people to wander the aisles. As they wander, they’re more likely to find other things to buy. (Seriously, this is a deliberate design decision!)
  • Warehouse stores often sell in bulk, which gives the consumer the illusion that they’re saving money. (And they are saving money — if they use everything they purchase instead of letting it go to waste.) But bulk sales also help the store. Their goal is to have people shop infrequently. The less people come, the less the business needs to spend on overhead.
  • A normal store offers a wide selection; warehouse stores offer limited selection. “When you have more selection, you have more labor,” notes Robert Price, founder of Price Club. Plus, you have to store the backstock, which costs money.

And why does Costco only accept Visa credit cards? Because they’ve struck an exclusive deal with the Visa payment network that saves them a ginormous amount of money. (Seriously, it’s huge.)

Online Shopping Gets a Piece of the Action

With the advent of online shopping, businesses like Amazon are taking the lessons from warehouse stores and building upon them.

When you buy something online, for example, much of the purchase price goes to shipping and handling — even if you don’t know it. When you pay $99/year for Amazon Prime to get “free shipping”, you’re still paying for shipping. The cost is embedded in each item’s price.

Knowing this, you can see how certain Amazon business practices make sense.

  • Lots of little things are “add-on” items at Amazon. You can’t order them on their own, but instead have to buy $25 of other stuff before you can place an “add-on” item in your cart. Otherwise, there’s no way for Amazon to recoup their labor costs.
  • I’m a big fan of Amazon’s “subscribe and save” program, which lets me receive one monthly shipment of items I use often (such as multivitamins, coffee, and dog food). When you subscribe to enough items, you get a big discount: 15%. That’s a win for me, but it’s also a win for Amazon because they’re able to do one big order instead of several small ones.
  • Recently, Amazon has introduced delayed shipping. When you place an order, you’re given the option of delaying shipment for a few days or a few weeks. If you do, you get a credit to your account. Again, this is a win for me and it’s a win for Amazon, who can then wait to fulfill the shipment the next time I order something.

This episode of Planet Money reminded me a lot of the book Why We Buy: The Science of Shopping [my review], which describes all of the many, subtle ways stores manipulate customers into buying more.

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Another way to visualize your finances: Color-coded expenses

This morning, I talked briefly about visualizing your financial progress when digging out of debt and when building wealth. Zach from Four Pillar Freedom has an interesting way of doing this.

He divides his expenses into three categories, which he has assigned arbitrary colors:

  • Purple things are free (or cheap) and they bring him joy. His goal is to spend as much time as possible in life doing the purple things. Examples: being in nature, spending time with friends, reading, writing.
  • Blue things cost money but they too bring him joy. He gives himself permission to spend money on the blue things from time to time without guilt. Examples: travel, coffee, dining out.
  • Red things cost money and don’t really increase his fulfillment. Zach’s goal is to spend as little as possible on the red things (without depriving himself or causing hardship). Examples: rent, groceries, utilities.

Here’s how Zach pictures his spending categories on a scatter plot:

Joy vs Cost

He writes:

I’d like to spend most of my day on the purple things. These things give life meaning at the beautiful cost of zero dollars. The blue things are like little treats. They’re great to enjoy every now and then. The red things are just necessary evils. They cost money and bring little joy.

While there’s an anal-retentive side of me that wishes Zach had chosen a different color combination (purple should be between blue and red!), I like this way of visualizing expenses.

It might be even more useful to classify them as “green, yellow, and red”, the colors of a traffic light. The free and cheap things that spark joy could be colored green for “go”. The costly things that provide fulfillment could be colored yellow for “proceed with caution”. And those expenses that don’t bring direct enjoyment could be colored red for “stop”.

[Four Pillar Freedom: The purple-blue-red philosophy of spending money]

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Visualizing your financial progress

Getting out of debt is tough for a lot of people. It’s both a financial and psychological challenge. Think of it this way: Getting out of debt when you haven’t learned how to manage money is like running a marathon without preparing physically. Both tasks are possible, but they’re much more difficult than they would be for someone who was actually prepared.

This is why many folks need to use psychological “tricks” when they repay their debt.

For example, I’m one of many who used the Dave Ramsey version of the debt snowball to finally achieve debt freedom. I tried (and failed) to use the mathematically optimal method — repay your high-interest debts first — several times. Once I shifted my focus to repaying low-balance debts first, I was able to plow through my debt without a problem.

Another game people play when paying off debt is the use of visualizations. Take Alissa, for instance, the GRS reader who created a paper chain to represent her debt. Each link in the chain represented $100. Whenever she made a payment, she got to cut off a few links — until the chain was gone.

This morning, Kitty from Bitches Get Riches shared a similar way to visualize debt:

This is the debt visualization I use today. It’s a brick wall representing my post-down payment mortgage debt of $252,500. Each brick represents one thousand dollars. I color one in for every $1,000 I pay down toward the principal. If you look closely, you’ll see one brick with a dotted black outline. That’s where I would be today if I only made minimum payments.

One way to visualize debt

Although these sorts of visualizations and psychological tricks are most commonly used when getting out of debt, the same concepts can also be applied when building your wealth snowball.

What methods have you used to visualize your progress toward your financial goals?

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The difference between investing and speculation

Hold onto your hats, folks. It’s rant time!

Based on what I’m hearing on Facebook, Twitter, and in real life, it’s time for a refresher course on the difference between investing and speculation. Although these two concepts share some commonalities, they’re very different things.

Let me start by telling a story, one I’ve told many times before. It’s the story of the worst “investor” I’ve ever known: me.

[J.D., counting his money]

The Worst Investor I’ve Ever Known

Before my financial turnaround, I didn’t really understand what the stock market was for. I viewed it as a sort of casino, I guess. I believed investors gambled on individual stocks and hoped that they’d outperform the rest of the market.

So, that’s what I did. I treated the stock market as if it were a casino. I’d pick a stock, put all my money into it, and cross my fingers. I took risky gambles hoping to strike it rich.

Unsurprisingly, I lost a ton of money.

  • During the late 1990s, some friends and I formed an investment club. Each month, we contributed money and picked where to put it. We chose stupid, stupid stocks — whatever was riding high at the moment. When the tech bubble burst, so did our bankroll and our enthusiasm.
  • In 2000, enamored by PalmPilot, I bought stock in the company that made the devices. I paid close to $90 per share. Just over a year later, the stock had lost 90% of its value. Oops.
  • One of my friends worked for The Sharper Image. In 2007, the company was struggling and the stock was in the toilet. At dinner one night, my friend told me how management was trying to turn things around. Sounded promising, so I put my $3500 Roth IRA contribution into the company’s stock. The company soon went bankrupt and my 2007 IRA contribution is now worth nothing.
  • During the banking crisis, I invested in Countrywide Financial. “Countrywide is on your side,” right? Wrong. Yet another stock that went to zero.

I wasn’t investing; I was speculating. I was gambling. I was trying to pick winning cards at the casino. But that’s how I thought the stock market worked.

The High Risk of Risk

After writing at Get Rich Slowly for a while, my viewpoint changed. As I became better educated, I realized that the stock market is not a casino. It’s a marketplace. It’s a tool that allows people to buy shares of businesses. (This is obvious, but trust me: Most people don’t understand this.)

When I buy a piece of one business, I’m taking on the risk associated with that business. We hear all the time that most small businesses don’t survive seven years, right? Well, even big businesses go under. Even big businesses lose money. There’s always risk associated with owning a business.

In the world of investing, “risk” is the probability that you’ll lose money. (There are many types of investment risks, by the way.) The notion of “return” is fundamentally tied to the concept of “risk”. The greater the risk — the greater the chance you’ll lose money — the higher your potential returns (gains) are.

One difference between investment and speculation is the amount of risk involved. When you put your money into something with minimal risk, you’re investing. When you put your money into something with high risk, you’re speculating. Like I said at the start, there are plenty of commonalities in the two actions — but the element of risk is a huge differentiating factor.

One way to mitigate risk is to own pieces of several businesses. Owning many businesses is even better. This practice is known as diversification. Diversification reduces risk. It allows you to enjoy the profits and benefits without getting screwed when one business goes under. This is investing. Putting all of your money into one stock and hoping that it increases in value is speculation.

A Random Walk

It’s also speculation when you hop in and out of the market, buying and selling stocks in the short term like day traders do. Day traders aren’t investing; they’re gambling on short-term price fluctuations.

In the short term, stock prices follow what has come to be known as a “random walk”. They bounce up and down with little rhyme or reason. Over the long term, however, the stock market as a whole tends to increase in value.

Why are stocks said to follow a “random walk”? Let’s look at an analogy. When I take Tally for a walk, we always follow the same route. We take a 1.85 mile loop through the neighborhood and it generally takes us 51 minutes. (Seriously, it almost always takes 51 minutes.)

Tally, taking herself for a walk

However, we never travel at a constant pace. Because Tally is a hound dog, we move in fits and starts.

  • Is there water in the ditch? Time to splash and sniff!
  • Are there deer in the pasture? We have to stop and bark!
  • Is that a new gopher hole? Let’s dig!
  • Wait, is that a squirrel? Let go of the goddamn leash, you jerk!

Each day is different. It might take us 20 minutes to walk the first 1/2 mile today, then we’ll travel the same distance in 10 minutes tomorrow. But when it’s all said and done, it takes us right at 51 minutes to go those 1.85 miles. (Sometimes we do it in 49 minutes. Sometimes it takes 54. But we average 51 minutes. And 51 minutes is the most common time to complete the walk.)

Our daily strolls through the neighborhood follow a “random walk”.

Over the short term, the stock market also follows a random walk. Both individual stocks and entire indexes fluctuate — sometimes wildly. I wouldn’t care to place a bet on what the S&P will do today, or tomorrow, or even next year. But if past performance is any indication — and past performance is the best info we have to go on — then I can be pretty confident that, on the whole, the stock market will show a steady increase over the next decade or three.

Another difference between investment and speculation is your time horizon. Investors are in it for the long haul; speculator are hope to make money off of short-term market fluctuations.

The Problem with Bitcoin

All of this leads me back to the folks I know who are so eager to speculate right now. I have several friends who are riding the Bitcoin bandwagon, and they think they’re savvy investors. They’re not. What they’re doing is speculating, the same as I used to do. They’re taking on high risk in the hopes of huge gains in the short term. This isn’t investing; it’s speculation.

If you want to speculate in Bitcoin, go for it. But don’t delude yourself that what you’re doing is investing.

I don’t remember the exact date I first heard about Bitcoin, but I remember the place. I’d recently started doing Crossfit, and I was using a foam roller to work out a kink in my quads on the floor of the gym. My buddy Dan was next to me, and he asked me what I thought about Bitcoin. (Dan knew I wrote about personal finance, so he always had money questions for me.)

I told him I didn’t know anything about Bitcoin, so he gave me a primer. If you need an explanation or refresher, here’s a Khan Academy video that provides an overview:

Based on the location and the people present, this must have been in early January 2012, when Bitcoin had reached a then-record high of $7.

“Would you buy Bitcoin?” Dan asked as we put away our foam rollers and moved to the weight room.

“I don’t know,” I said. “I’d have to learn more about it. I have a policy of never putting money into something I don’t understand.”

After that conversation, I did some reading about cryptocurrency. I decided I liked the idea, but as a store of value, not as an investment. To me, that’s a very big difference. I like the idea of a decentralized currency that’s not controlled by any one government. That’s kind of cool. But in 2012, I didn’t like the idea of sinking money into a Bitcoin as an investment.

In the past 5+ years, the value of Bitcoin has skyrocketed. Recently, it’s been trading at $7000! In other words, the value of Bitcoin has multiplied one thousand times since my conversation with Dan on the floor of the gym.

If I had moved all of my invested capital from index funds to Bitcoin in early 2012, today I would be a billionaire. If I had invested even just $1000 then, that $1000 would now be worth $1,000,000.

Did I screw up? I don’t think so. And given the same choice again, I’d do nothing differently.

That’s because I believe strongly that nobody is actually “investing” in Bitcoin; they’re merely speculating. So far, that speculation has paid off. And maybe it will continue to pay off. But I believe it won’t go on forever.

Be Fearful When Others Are Greedy

Another one of Warren Buffett’s most famous quotes is appropriate to this situation: “Be fearful when others are greedy and greedy only when others are fearful.

Right now, the folks pouring money into Bitcoin (and other cryptocurrencies) are greedy. For that reason, I’m fearful. This looks exactly like so many situations I’ve seen in the past, including my own past “investment” mistakes. While I’m fine with the underlying concept of cryptocurrency, there’s no way in hell I’d put my own money into it now. Not a chance. The risk is just too high.

Bitcoin is NOT an investment

What if you want to put money into Bitcoin? Fine. Go ahead. But don’t you dare think of it as an investment, because it’s not. It’s just like playing blackjack at the casino.

And if you do want to put money into cryptocurrency, please do me a favor: Only use money that you can afford to lose.

  • If you’re struggling to make ends meet, steer clear.
  • If you’re in debt, steer clear.
  • If you haven’t funded your retirement accounts for the year, steer clear.

If you don’t have your financial shit together and absolutely must make the leap, then limit yourself to at most sinking five percent of your “savings” into Bitcoin. Any more is gambling with your future.

But if you’re debt-free, have some savings, and have set aside money for retirement, then take the risk if you want to. In my mind, it’s no different than putting your money into the Palm IPO like I did. (And I think the results are likely to be the same.)

Right now, it feels to me as if we’re in a Bitcoin bubble. Maybe I’m wrong, but that’s what it feels like. It feels just the same as the housing market in 2007, as the stock market in early 2000. And here’s the thing: There’s no risk in not putting money into Bitcoin. If its value jumps to $70,000, then all I’ve lost is some opportunity cost. I’m fine with that.

Final note
I’m going to state this explicitly because otherwise the comments are likely to get derailed. I am not anti-Bitcoin. I kind of like the concept of cryptocurrencies, but as currencies, not as investment vehicles. What I’m worried about here is Bitcoin speculation.

This is the same concern I feel when I read about anyone who tries to get rich quickly. In 2006, for example, I was writing about folks like Casey Serin, the young man who thought he could get rich buying and flipping houses. Instead, he crashed and burned. I’m afraid the same thing is going to happen to many folks riding the Bitcoin bandwagon.

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