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[00:00:00] Hi, everyone. Welcome to the Armchair Entrepreneur podcast. This is the podcast where we explore what it is to be an entrepreneur. The mindset’s questions, hurdles and problems you might face on the path away from the rat race. I’m James and I’m joined by my co-host, Marcello. How are you been getting on this week, Mike? [00:00:16][16.0]

[00:00:16] Hi, Matt. Yeah, thanks for calling in. Oh, good. How are you? [00:00:22][5.6]

[00:00:23] Good. Good. Yes. Varig It’s absolutely diced up to keep it around here, but I’m sure we’ll get through it. So today we’re going to be talking about passive income. So this has been prompted by a tweet that I saw the other day from a guy called Nat Eliason of a company called Growth Machine, and he tweeted out, There are almost no forms of passive income that are actually sustainable in the long term besides real estate business ownership. Every other form dies in a couple of years unless it becomes on passive. So this caught my eye because passive income is the absolute dream of an entrepreneur. Many of us, when we first start off down this entrepreneurial path. Passive income is this ideal of having money just rolling in while you sit there and sip martinis next to the polls. So first off, Marcello, when when you hear the term passive income, what what does that mean to you? What does that make you think of? [00:01:20][56.8]

[00:01:21] Well, passive income will be essentially to generate income without actively working on it. So classic examples are could be like the stock market or having a property and renting it out. So although it requires some of your time broadly, at some point you will need to research for defining which asset you are going to place your bet on. You’ll need some Montaigne’s or you will need to know when to get out as well. But it’s not like your day to day job or day to day concerns. So it can appreciate in value over time. So it can run simultaneously, for example, with other sorts of income for, for example, your labour based income, which is more of your day to day efforts to pay the bills. [00:02:14][53.2]

[00:02:16] Yeah, for sure. So for me, the first time, I really start thinking about passive income or the first time it sort of crossed my field of view. Many moons ago when I read the Four Hour Work Week by Tim Ferriss and you know, a lot of that book is around sort of creating those systems and assets to create this idea of the passive income. Even know the title of the book was quite provocative in terms of the four hour workweek. He didn’t mean it, literally, but, you know, when you saw it on the shelf, that was the thing which sort of popped off. And when you’re working in some, like, horrendous low value kind of drudgery of a day job, that sort of thing really leaps out at you. And yeah, that idea of being able to invest in something which then sort of continues to throw money time over time and you can just sit back, relax. That definitely sort of appealed to me over the years. I’ve obviously sort of discovered that it’s not quite as simple as that, which is true of most things in life, I’m sure. I thought it was interesting, actually. What sort of. Nat was saying about passive income dies unless it becomes passive. What do you think? He’s sort of getting out in that sort of idea. [00:03:28][72.0]

[00:03:29] Yeah, I was interested on what when you said that over time it will die. I said for all for readdressed real estate or owning a company. I think those could die as well. I mean, over time, if if it’s not granted, people usually takes for granted, like property investment is safe and it’s going to grow. [00:03:50][21.2]

[00:03:51] But that really it’s really not true. I mean, matings going to happen then. Yeah. It’s like any other asset. So I don’t think there are asset classes that can grow up so. All right. Treat all asset classes like stocks, commodities, bonds, whether real estate as well. Even your own property. And if you are living in your own property, paying a mortgage and comparing that to a rent or whatever. I’m thinking e more emotion and value thinking it’s your home. But leaving that aside, it is still like an investment. So. So you should treat the assets classes for the same. I do agree that it will expire over time or it can decrease in value. So it would be something that Brawley’s generating X for you now and it’s like 20 percent of your income or whatever. Over time, it’s unlikely to stay the same because of competitive forces. If it was too simple, then everyone would do it. So if everyone would do it, then the margins would shrink anyway. So that’s how it works. But yeah, I would say also it’s important not only to have so it’s so important thing would be for entrepreneurs subleased or anyone actually will be to have multiple sources of income. So some of them would need to be passive because you how just X hours per day to work. You can work eight, 16 hours, whatever you want, but it’s limited. So. So having different source of income could be many jobs. But but again, that will be limited. If it’s labour intensive, you have like a hard ceiling. So. So that’s why it’s important to Jarry, these other sources of passive income. I think he was getting there is the Holy Grail, as you were saying. Yeah, probably. [00:05:52][120.8]

[00:05:54] Also, you touched that point. It’s not that easy to get there. So then if it’s not that easy, then it becomes if you start taking out a considerable amount of time, then it becomes your day to day activity. So you need to be careful with that. Yeah. So wait with your expectations on what you’re planning on how to create that. So say the focus probably should be diversify your source of income rather than grade mutable passive income sources. [00:06:21][27.5]

[00:06:24] Yeah, so that the point that goes on to make in his sort of twisted thread is that the sorts of passive income that he’s talking about is he’s saying things like an Amazon affiliate site. So that would be something where you’re leveraging sort of SEIU to bring people to your site and then getting them to click away to Amazon and purchasing products. And therefore, you get some some sort of commission or like one of courses where you teach something. You know, people come along to you because of some effort you’ve made in marketing or distribution, like you’ve got to podcast. So you’ve done sort of one off evergreen, kind of like marketing things. And so, you know, inevitably in those cases you will, you know, at the point at which you make them or at the point at which you’re sort of putting the most investment into the distribution of those kind of things. That’s the point at which they’re going to make most money. But if you just leave it at that, by its very nature, it’s just gonna tail off over time. And effectively, what he’s saying is, is that. He’s suggesting that if you do manage to make something like that or if you do invest in something like that and you are making money that rather than you should be doing something more active with the money that it’s actually making. [00:07:32][68.8]

[00:07:33] So though it’s not the case that you should sit there and use it to fund your sort of beachside lifestyle or not, should be buying your toes and whatever else you get up to, but you should be recycling that back into other assets, some other projects, so that effectively, rather than sitting on your laurels and just waiting for your money to run out slowly over time, that you’re actually sort of reinvesting that back into other assets, things that are more durable. For example, you know, Amazon. Affiliate sites. Far less durable than something like real estate income. Now, on a percentage basis, in terms of the amount of capital that you put in versus what you get out, they might be a better return in the short term. But you know that the longer term assets, assets that don’t depreciate over time, you know, things like that. I think. [00:08:20][47.6]

[00:08:24] One thing. [00:08:24][0.2]

[00:08:27] I found so. I have had a couple of experiences with sort of like classic passive income products in the past. So many years ago I had my girlfriend at the time she was applying to join the airforce and as part of the exams and things that you have to do in order to pass, you know, to get into the airforce. They had these mental arithmetic problems where you had to go in and do lots and lots of very quick sort of simple mathematics in your head. And she was finding that a bit of a struggle. So I just put together this simple little BHP script at the time to help her do these sums real quickly in a head and sort of time her so she would know that she would be able to do these things and get in under the time barrier. And I put that online and she just sort of mentioned it on a forum for people who were doing very similar things. And from that moment forward, basically for about the next 10 years, that just got consistent, fairly high levels of traffic. I think I pretty much captured the market in terms of people who wanted to join the airforce doing these mental arithmetic questions. And on there, after a couple of years, I was like, well, you know, I should try make some money off this. So I I collated a whole bunch of these questions into, like PBS and then sold them via the site so people could download them, print them off and do the exam as if they were doing it sort of real life. And that thing used to make me 200, 250 great every month, like month after month after month. So it is a nice little sort of flow of cash that was was coming in. I didn’t reinvest that money very sensibly. I effectively use it as being money, you know, or fund money. So. So why what? [00:10:14][107.0]

[00:10:14] What. So you said it last 10 years. So what happened? [00:10:17][2.9]

[00:10:18] I eventually had an offer too. I actually had someone another form of sort of income on the site itself, which was I had to add so on there from a particular company which sold guides to like joining the police, joining that airforce, joining whatever it might be, and that company, Visy, turn around to me and offered me to buy the sight of me just for their own purposes. Basically, they would just repurpose that. So, yeah. So I ended up selling it for like forefingers, which was, you know, a pretty decent return on something which didn’t make a huge, huge amount money. It just been very consistent, a very sort of like long term. And the other one, which I had some success with, was in my previous Start-Up. We were doing a lot of UI design using a tool called Balsamic, which is kind of like a system for sort of prototyping various rough UI layouts. And our product at the time use a lot of charts and graphs and things like that because we were trying to sort of show data back to our users. But this balsamic tool didn’t really have any sort of charts or graphs as part of its pre-built templates of a thing. So we basically got a graphic design to sit down and create a whole bunch of different charts like bar charts, line charts, pie charts, all this kind of stuff. And we we use them in our own UI. And then we just stuck a Montgomery out as a pack and just sold them as like a balsamic chart pack. We contacted Balsamic the company itself, and they stuck a link to us straight in on their site, on their sort of useful resources. And we used to get a really regular ticket, people coming through and buying that. I think we we did like six to seven thousand pounds worth of sales of annually, which was something we had probably spent today one month or Malazan at most. When that was in, that was in like, you know, graphic design, a time for relatively little money. I mean, that was a great return on investment from a passive perspective. [00:12:24][125.4]

[00:12:25] So that’s interesting. Yeah. So I think most of our audience are intrapreneurs or or want to become entrepreneurs. So it’s really important. Usually when you don’t realise about this. So as you were saying, you do you just stumble upon by accident almost. Although you develop that mindset over time at least, to be open minded, to have some percentage of your effort going into that direction. Something. Personally, I never done it. So it’s important that the audience to know that, yeah, this is not done. Investment advice. Oh, yeah. Go diversify into the glass with glasses and build possie being gun blast leave. Of course, that’s the ideal scenario. Probably everyone knows it from personal point of view. I’ve never done it or not to a significant extent. My reasoning was that rather focus on. What I’m doing and get better at it so I could be on our strategy. So the investment principle is don’t put all your eggs in one basket. So then that counter argument will be put all your eggs in one basket and watch that. But that basket. So so following is so not broadly, I would say I would recommend to diversify, but focussing is very important as well. So broadly, abundance is the best. [00:13:52][86.8]

[00:13:53] So I would say that then the key takeaway here would be just don’t underestimate the importance of that on you. [00:14:02][8.2]

[00:14:02] And if it takes you off, your path is important to explore to to to try to learn. Probably. Maybe I’m commenting based on your experience or something that could be useful is that you can start by trying small ways of grading or small tickets of passive income into ways that are familiar to what you do already or in topics that you are familiar already. Just putting content out there. Of course, our programmes have all these Bremen’s skills, or you can build tool tools that are useful. Many people don’t have that skill, but they they for sure know about something. [00:14:45][43.1]

[00:14:46] It could be even a hobby. Doesn’t need to be business or technical. So just. Yeah. Maybe create some really quality articles. At least if you see it’s gaining visitors, then you can take it from there. So create digital materials. So any form of content you can also go oh or whatever. But that probably is the path of recent resistance to just use what whatever, you know, already. So you don’t need to go explore. If you I mean, if you go exploring it will it could become daunting at all. [00:15:27][40.2]

[00:15:27] Usually those passive income opportunities, if they join a decent income, they’re very rare. So they’re difficult to identify. So they’re a country intuitive. So it’s so yeah. You can, though, establish a process to go find them properly and now start to just build some monitoring processes or systems to cheque what’s coming up or trend trending. Social media or Google Trends. [00:15:59][32.1]

[00:16:01] Set. Set up some alerts on that. But still even doing that, it will take you this amount of of work because it’s not that straightforward and you will need to interpret all that. I usually try to stay away from the stock market as well. Like personality based on. Experience that. Yeah. Problème. [00:16:28][27.0]

[00:16:31] Yeah. [00:16:31][0.0]

[00:16:32] I’m not. So I would say people in general light homosapiens that we are all world chimps ultimately where we are very bad at outlining long term. And there are so many examples I savings smoking each other. So why are you prioritise short term benefit versus long term. So that’s why. I gain respect for the stock market. Yeah, you do need to do a bunch of research, but you can play some. You can take it less seriously with less money and play some. Or if you don’t understand broadly, my advice, at least for new, is that I am a new in the stock market would be just a track. [00:17:19][47.0]

[00:17:20] Now you have all these ETF or or these truckers in indexes that would track the performance of the top 50 100 companies in a space that you may know well, like take or whatever, agro industrial or automotive, etc.. So so then track that industry based on you, which should be more stable. And I should. Yeah. I mean, appreciate over time. As long as so even stock markets in general should appreciate your time. Is GDP growing slowly. So that’s that’s better. [00:17:55][34.8]

[00:17:55] Does it even if it’s a low appreciation, like just a market average, it will be better than nothing. And another small investment over time compounds, as we know. And that’s you feel more comfortable. You can add more there and you can make a difference. Yeah, especially. Maybe I’m getting off topic, too. Cooped up in there. Yeah. In there. What is actually related to the economy? I would say from my broader point of view. So I was perplexed. And I still trying to figure it out. Like many others, how on earth can like there be this year could be a pandemic, unlike more white pandemic. And and then all economies in recession, like three, four or five percent, whatever, deep recession and the stock market bullish lie all all time high. Not so fast. Yeah. Keeping afloat just All-Time High. Of course, it’s well known that it’s a consequence of the governments pumping more liquidity into the markets. Do not let that increase asset prices, namely stocks. So, yeah, they go up. But that’s that it’s artificial for sure. [00:19:15][79.6]

[00:19:17] My point I’m trying to get on what how it’s connected to the passive income or whatever is that it becomes really frustrating when like us as an entrepreneur. So it’s hard to build companies that add value. So if it’s hard to make money and then you can see just how easily and disconnected other there are other ways to make money. And don’t get me wrong that it’s easy to make money in the stock market. But for certain people who controls their, let’s say, the funnels of how money is deployed. Yet they have access to information as well. So financial sector in general, financial professionals, you if you were if you’re ready, have assets there and they appreciate that 20 billion if you do nothing. So about four young people who are trying to build their own careers, get into the property ladder, gain some savings and so on. So it’s becoming more and more important to understand these non-traditional externalities like non related or not linked to the real economy, basically. So so not only you need to if you entrepreneur and you need to go create a business, add value, try to grow it, you would you do really need to pay attention to what’s going on in the stock market, in the economy. [00:20:41][83.7]

[00:20:42] Government policies, I would say policy he may use may sound like a lot to take on, but it’s becoming a must. It has always been important, but now it’s critical. I mean, even your current make up savings in certain currencies that may lose a lot of value down the road. And that’s actually some of one of the biggest, let’s say, hypotheses, our options moving forward that the bubble is so inflated. [00:21:14][31.7]

[00:21:15] Then let’s say the U.S. dollar is taking advantage of fiend. Then the base currency by 70 percent of the base currency war, Whiting’s central banks. [00:21:24][9.1]

[00:21:24] But China might dispute that down the road. And if you can hold in dollars or mostly in dollars or pounds or euros. Yeah, maybe not worthless, but were worth less. [00:21:37][12.6]

[00:21:39] Yeah. So. And then there you are, people who get peace with the government. What the fuck are you doing. Or these Sadad. But. [00:21:46][7.8]

[00:21:48] It’s your responsibility, ultimately. So you you need to understand the basics. Just just follow some people on line and try to make sense of it, because it’s it’s really it’s crazy what’s going on. It’s not the first time, but it’s happening at that pace. And. I was that magnitude that this approach has never been seen. I need your eyes. Multiple things happening at the same time. Like negative interest rates. No. No inflation. You will lose productivity. So you see, this is maths. Of course, inequality. That’s a big issue as well. So I do. Yeah. I don’t like a doomsday scenario. I got. I have taken and take on like risks. On what risks. But damn, I’m seriously paying more attention to all these factors. [00:22:45][57.4]

[00:22:47] Yeah. [00:22:47][0.0]

[00:22:47] I mean I feel like we probably can’t solve the world’s ills in one podcast, but I’m sure from from an individual perspective, I think it’s important that I think you can pretty much sums up the whole chunk of what you’re saying by saying that if all of your assets are in cash, then you are over exposed to any potential sort of deflation or stagflation or anything that may happen on the world markets. Whereas if you have assets which are acts of actively money generating BDA businesses or other sorts of passive sort of income vehicles, then then you’re slightly to a certain degree hedge against that kind of stuff. [00:23:29][42.2]

[00:23:30] Yes. No, because let’s say you have property and you have a property in the UK Brexit kit. The pound depreciates like 20 percent then. [00:23:40][10.0]

[00:23:41] So unless you live in the UK where that does matter to you, if from an investment point of view, if you want to go live somewhere else. [00:23:49][7.2]

[00:23:49] And you need to sell your property to go live in the US, for example, or in any other country, then it liking from a currency point of view, your investment have lost like 20 percent on the principle value, which is a lot, and probably you lost money if you bought it two years ago. So. So that’s not cash. So it’s a property investment. Then also you can have investments in 18 stocks that are generating an income, maybe due to dividend payment or whatever. But let’s say those companies that those yields are in in US dollars and then you live in the UK. So those are our three hundred dollars, three percent, 250 pounds to you monthly. So it’s a decent income, but then the dollar depreciates for whatever reason, becomes less value for you in pounds. So then we sell off 250 becomes 150. So it’s not that great or it becomes 50. Or that company has a huge exposure to the US market, which goes bad for X reasons. So there is now I do agree with you, though, that in. Times. So if you don’t know where to place your money or assets or rather choose like cash flow generating businesses, those are most likely to weather any scenario. And they’re proven to work, especially if they have room for for many years. They can still, you know, like an airline going in the states or a hotel chain. Could could be a total disaster. But they even made record from that. So, yeah, cash flow generating businesses, that that’s the way to go. And if they pay dividends as well that you’re getting, you’re not betting on capital appreciation only, but you are getting a cheque every month, every quarter or every year. Yeah, that’s that’s a return on investment. [00:25:59][129.4]

[00:25:59] Yeah. Absolutely. I think. [00:26:04][4.4]

[00:26:06] Cycling back a little bit, just to sort of wrap things up in terms of. The question of should you explore passive income if you’re an entrepreneur? I think the best angle that I heard about it and the reason actually, which prompted me to create that. Create and sell a graphics package or tachographs, rather, on them, on balsamic, was Jason free to 37 signals or base camp as they are now? Had a thing. I think he one of his books, which is a little phrase that was Sell Your By-Products. And the example he gave was Ford. So. When Henry Ford was originally making the original Model T Ford cars, they used a bunch of wood in the construction light to make some of the seats and things like that. And so they had a lot of offcuts of wood sitting around the factory doing nothing, which which is effectively waste or by-product of the creation of these cars. And he looked at that said, right. Okay, well, you know, we’re just trying to stuff the stuff away. What what can we do with this? And. [00:27:16][70.1]

[00:27:18] Well, they ended up doing is they ended up taking that and turning it’s charcoal and selling charcoal. And that charcoal business, I forget the details of it now. But nowadays is worth like multiple billions of dollars and still sells charcoal like throughout the world. And obviously, it’s not offcuts room for cars anymore. But, you know, there is still value to be had and value the value to be made in things which aren’t central to your sort of main business focus. So for us, it was like, sure, we were producing, you know. Consulting kind of data, digital assets, but it just so happened we needed certain things, it was if we had to create some of those artefacts as part of our output, that those artefacts had value in and of themselves. So if we put them into the market, we could sell them. It wasn’t any extra. No skin off our nose. We could do it. And it was just an extra. Will take a trickle of cash that sort of came in. [00:28:10][52.1]

[00:28:11] Yeah, absolutely. Yeah, that’s definitely the way to go. Your By-Products. [00:28:16][4.7]

[00:28:19] 10 percent. Yeah. So yeah, I would recommend also hundred percent to incorporate sooner than later. Safer investments to create like some of it, because apparently by definition is risky. So yeah, any company you set up is gonna be a huge risk. It doesn’t matter which company you’re setting up. And then yeah. If you have savings on the upside is the safest. But it doesn’t add value. Doesn’t gite passive income at all. In fact, some countries need to pay nowadays. Cost savings. It’s ridiculous. But it is when this ticket in your mattress. That’s what you said. I wouldn’t go that far. Yeah. Bob. Yeah. You will need a lot of mattresses over time. If you if you’re going to I mean, depends on your culture as well. Many countries, they like savings. And then you have the Americans on their hand about like more to go forward, consuming. Invest probably recommended to take a bit of both the middle ground to get started. And then as we feel comfortable, let’s just go for it. Yeah, of course. Ideally, if you’re gonna have all all of your income to be a passive income, that’s the best case scenario. But. Yeah, it will take time to grow that way, and ideally, you should have multiple sources. [00:29:55][96.0]

[00:29:57] Absolutely. So I think takeaways for people who are listening. I would definitely explore passive income. Don’t treat it as if it’s like magic beans from afar that you meet on the track on the way to market. It’s not going to be the sort of primary cause of your future wealth, but it’s definitely something which can help hedge against sort of problems and can also bring in some extra cash to spend on getting more purchasing more assets, which will sort of grow your nest egg over time. Right. Thanks very much for listening. We’ll be back next week with some more grandstanding and pontificating. In the meantime, please cheque out our YouTube channel where we post this and our other podcast. If you search for networkers on YouTube or you can find a link in the show notes that accompany this podcast. If you’re interested in a deeper dive into all things entrepreneurial, including more things like detailed information, help mentorship courses, please cheque out our Web site. And that is that networkers dot co. See you next time. [00:31:01][63.5]

[00:31:01] See you. Thanks so much. [00:31:01][0.0]


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