Time as an Investment for Entrepreneurs

Thinking of time as money is a good way to allocate your time when you’re working. Now I did say while you’re working. Not when you’re with your family/kids/loved ones/on dates etc.

While it’s true that lost money can indeed be recouped but time cannot; lost money is actually more difficult to make back as an investor.

Let me explain. If you invested $1 million and you lost 80%, you will be left with $200,000. If you make 80%, then you will not get back to $1 million. Rather, you will have $360,000. In order to get back to where you started, you will need to earn 500%. Not an easy feat for most investors.

It’s for this reason that when you are considering an investment manager, you should look at their performance during difficult times. The ones that lose less money during market downfalls are typically the ones that make you more money over the long run (in fact, some of the best investors/investment managers earn positive returns in down markets). So the fact that money is more difficult to make back, especially at the higher end, it still makes for a good analogy.

Now let’s go over a few investment techniques and see how we can apply them to time.

Hurdle Rate

A good investor will tell you about the hurdle rate. This is the minimum level of return per year that you expect when you invest. For instance, the hurdle of Warren Buffett was 15%. That means that if you invest $100 in Facebook and you make back less than $15 in the first year, you should ignore the opportunity. If you take the long-view (which I think you should), then you take a 5- or 10- year view. That means that $100 should return an additional $101.14 over 5 years and anything less than that is unacceptable. It doesn’t matter if Facebook has down years as long as it gives you what you want after 5 years.

The hurdle rate’s equivalent in time can be your hourly rate or the expected future value of your activities.

If you’re a good rails freelancer for example, you can probably get $200+ per hour. Assuming that you have clients, then it makes sense to focus only on activities that are worth more than $200 an hour. As a freelancer, your most important activity will typically be marketing, sales and doing the actual client work. That means getting your name out there, networking, speaking at events, presenting to new clients, speaking with existing clients, writing a book, building a great team, etc.

If you’re not a great designer, then you should hire a designer to design your homepage rather than learn photoshop yourself. Instead of writing your own CMS, you should probably just use WordPress. Instead of doing the bookkeeping yourself, you should outsource it.

I like to call this the Expected Value of Activity (EVA). What’s the EVA of blogging? If you’re blogging for KissMetrics, a really great blog post can yield over $30,000 in revenue. Say it takes 6 hours to write up the blog post. Then the EVA/hour is $5,000. Then that’s a great use of time. Of course, most posts don’t make that much in revenue. What you can do is see how much your post makes on average over a period of time (say 1 month, 1 year, 3 years etc.) per post. If you’re just starting out, then you can measure value as engagement (e.g. how long they stay on your website), amount of traffic, amount of email sign up, etc. Remember that EVA doesn’t have to be money — it’s whatever metric that’s relevant and valuable to you. And the returns don’t need to come in on Day One. Just as with investing, you can determine the value based on what happens over a period of time. If you blog consistently, then you will build up a readership base.

I have written in 6 Time Management Hacks that you should have a to do list. If you are an entrepreneur or business owner, then this is critical. If you don’t use a To Do List, then you will be asking yourself throughout the day, “Is what I’m doing really necessary or am I just being really active?” When you have a million things to do and you don’t have a list, your focus tends to narrow to the short-term. You will react to things as they pop up. If instead you have long terms goals/objectives and break them down to monthly goals and then to daily to-dos, your daily activities becomes much more organised and focused on what matters.

You should occasionally review what you’re doing and see which activity is producing the results that you want. Apply the 80/20 rule to it and update your list or what you’re doing accordingly.

When you go through your list, keep in mind your “hurdle rate”. Think carefully about the key items which will really help you achieve whatever it is you want. You’ll find that there are a few things that will move the needle a hell of a lot more than the rest. Sometimes, those are the things which you will procrastinate most.

Compound Interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” 

Albert Einstein

 

$0 to 1,000,000

$1 to 1,000,000

If you were given US $1 and you were told that you can double it each year, how long do you think it would take to get to over a million dollars? 100 years? 50 years? The answer: 20 years.

Look at the graph above. You’ll see that the magic of compound interest happens with time. You get the fruits of compound interest at the tail end of the curve. That’s how Warren Buffett grew Berkshire from $15 in the 1960s to over $150,000 today. So it is with time. Wisely invest your time and your output and achievements will see similar gains. Focus your time on the things that really count.

If you want to write a bestseller book, then find time to just write an hour a day. The issue is not that you don’t have enough time. You’re not suppose to write the whole book in one day. If you write just an hour a day, you can have a completed book at the end of the year. There’s a short ebook on time management for writers for those of you interested in writing.

What I find works best is to have ONE thing that you want to achieve next year and then work backwards. Decide on what strategy you will pursue to achieve this. Then what tactics. Keep going until you have small specific actionable steps that you can take.

As you cut out useless activities from your life, the impact of your time will magnify and compound.

Focus on a Few, Not Many

Don’t put all of your eggs in one basket. Diversify. These are all terrible advice for the savvy investor.

The idea is that the more stocks you own, the more you eliminate “risk.” Certainly if you don’t know anything about investing, then you should diversify as much as possible by dollar averaging into an index (buy a basket of shares which represent Corporate America and buy monthly so your cost of investment is spread out).

On the other hand, if you’re a savvy investor, then that’s the best way to water down your return. If the company you’re looking at is worth $100 million and it’s selling at $50 million, then that’s a bargain. If it’s a great company with great management and the only reason they’re selling for such a low cost is because of some bad press or a hiccup that they can recover from, it may well be worthwhile investing most of your net wealth into the company. When people realise that the news wasn’t as bad as they had initially expected and the price returns to $100 million, then you’ve doubled your investment. If you had diversified, then of course your returns would be much closer to the market average. The more you focus your investments on a few core companies, the better you will do.

So it is with time. When you decide to do something, just do the one thing and choose do it well.

Choose a few tactics, and do those well. Don’t try to pursue every single tactic that “may” work because they won’t if you pursue them all.

Choose a strategy, and do it really well.

That will give you the best chance to achieve what you want and make the best out of your time.

Further Reading

Focus by Leo

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