Tag Archives: finance

How to Make Money

After my musings on God and atheism, which some may have found useless, let’s look at a supremely practical problemhow to make money. Loads of it. Apparently, it is one of the most frequently searched phrases in Google, and the results usually attempt to separate you from your cash rather than help you make more of it.

To be fair, this post won’t give you any get-rich-quick, sure-fire schemes or strategies. What it will tell you is why and how some people make money, and hopefully uncover some new insights. You may be able to put some of these insights to work and make yourself richif that’s where you think your happiness lies.

By now, it is clear to most people that they cannot become filthy rich by working for somebody else. In fact, that statement is not quite true. CEOs and top executives all work for the shareholders of the companies that employ them, but are filthy rich. At least, some of them are. But, in general, it is true that you cannot make serious money working in a company, statistically speaking.

Working for yourselfif you are very lucky and extremely talentedyou may make a bundle. When we hear the wordrich,” the people that come to mind tend to be (a) entrepreneurs/industrialists/software mogulslike Bill Gates, Richard Branson etc., (b) celebritiesactors, writers etc., (c) investment professionalsWarren Buffet, for instance, and (d) fraudsters of the Madoff school.

There is a common thread that runs across all these categories of rich people, and the endeavors that make them their money. It is the notion of scalability. To understand it well, let’s look at why there is a limit to how much money you can make as a professional. Let’s say you are a very successful, highly-skilled professionalsay a brain surgeon. You charge $10k a surgery, and perform one a day. So you make about $2.5 million a year. Serious money, no doubt. How do you scale it up though? By working twice as long and charging more, may be you can make $5 million or $10 million. But there is a limit you won’t be able to go beyond.

The limit comes about because the fundamental economic transaction involves selling your time. Although your time may be highly-skilled and expensive, you have only 24 hours in a day to sell. That is your limit.

Now take the example of, say, John Grisham. He spends his time researching and writing his best-selling books. In that sense, he sells his time as well. But the big difference is that he sells it to many people.

We can see a similar pattern in software products like Windows XP, performances by artists, sports events, movies and so on. One performance or accomplishment is sold countless times. With a slight stretch of imagination, we can say that entrepreneurs are also selling their time (that they spend setting up their businesses) multiple times (to customers, clients, passengers etc.) This is the only way to address the scalability issue that comes about due to the paucity of time.

Investment professionals (bankers) do it too. They develop new products and ideas that they can sell to the masses. In addition, they make use of a different angle that we discussed in the Philosophy of Money. They focus on the investment value of money to make oodles of it. It not so much that they take your money as deposits, lend it out as loans, and earn the spread. Those simple times are gone for good. The banks make use of the fact that investors demand the highest possible return for the lowest possible risk. Any opportunity to push this risk-reward envelope is a profit potential. When they make money for you , they demand their compensation and you are happy to pay it.

Put it that way, investment sounds like a positive concept, which it is, in our current mode of thinking. We can easily make it a negative thing by portraying the demand for the investment value of money as greed. It then follows that all of us are greedy, and that it is our greed that fuels the insane compensation packages of top-level executives. Greed also fuels fraudponzi and pyramid schemes.

There is a thin blurry line between the schemes that thrive on other people’s greed and confidence jobs. If you can come up with a scheme that makes money for others, and stay legal (if not moral), then you will make money. You can see that even education, traditionally considered a higher pursuit, is indeed an investment against future earnings. Viewed in that light, you will understand the correlation between the tuition fees at various schools and the salaries their graduates command.