I know the financial facts that most people don’t – that less money spent on a new car can add up to millions over a lifetime. (That blog entry was how I talked myself out of buying a Mercedes SLK 350. Instead, I bought a Miata.)

Let’s get real, though. The $33,000 I spent on the Miata (after sales tax) could be invested. At 10%, it would return $275/month, every month for the rest of my life. Instead, I own a depreciating asset that will last me probably about 8 years before it will need be replaced.

I also bought a lot of art recently. I went for high-quality art from known artists, and bought at auction, so my costs were significantly reduced over paying retail at a gallery. Still, I spent $12,000 on art. Assuming it appreciates at 1% per year (art, thankfully, unlike cars, does appreciate a bit), I’m “only” passing up $90/month, every month, for the rest of my life.

Doing the math, I could have had $365/month, every month, for the rest of my life, but I gave it all up. Why?

The answer is the same reason you probably don’t have any money saved right now, and it will probably surprise you at first. When you look at it a bit more closely, though, it makes sense…

Why You Don’t Save Money

Spending money gives you an emotional “high”. Marketers know how to prey on your emotions so that buying that sports car, expensive cell phone, or high-end TV becomes not a negative cash-flow situation, but an integral part of how you define who you are.

Stop for a minute and think about this. I’ve lost count of how many people refer to their iPhone as an iPhone instead of a cell phone in conversation. Same for Apple laptops — it’s no longer a laptop, but a “MacBook.” (I use Apple products as a reference because Apple is undoubtedly the master of emotional branding.) Look back through your blog entries, chats, or text message logs, and you’ll see similar trends. Whenever you buy something based on emotion, you’re more likely to refer to it by its brand name. It is a subtle way of getting this point across: “I spent a lot of money on this. That means I am a more interesting person!”

And that’s why your savings account balance is probably close to $0…because product marketers have mastered emotional branding, but savers and investors ignore your emotional needs and focus on the numbers.

Three Quick Steps to Break the Emotional Trap

How do you turn the cart around?

First, accept the fact that you buy things based on emotion. The more integral the purchase to how you define yourself, the more likely you are to buy something based on emotion. If you’re constantly using your cell phone, you’re more likely to buy a more expensive cell phone — not because it’s more functional, but because you look better using it. Do not fight this or try to justify your purchase with logic. Simply accept that you have made past purchases based mostly on emotion.

Second, realize what emotional need made you buy the product! This is the biggest step, and also the most difficult. Try to distill it down to one or two words. Why did you buy the expensive cell phone instead of a cheaper one? Ignore the features (those are justifications!) and press inward. Think more deeply.

Today, I thought about what connecting factor would have made me buy both a lot of art and a new car. Oh, sure, there are plenty of facts (justifications.) Let’s get those out of the way first: art will appreciate in value; my current car had nearly 150,000 miles on it; my boyfriend needed a car to commute to work due to a change in the bus schedule. Now that you have all those out of the way, concentrate on how the purchase made you feel. I found that I thought the purchase (in both cases) would make me more beautiful.

You’ll know you have it when you think, “Oof.” The real emotional need below all the justifications will hit you right in the heart. It may make you a bit sad, as you realize that there is a lack in your life that you feel you need to fill with stuff. Don’t fight that. Embrace it. This is a process, and you will come out on the other end understanding yourself better.

Third, really think about that need, and become aware of other emotional needs, when you buy in the future. There’s no going back. What you’ve bought, you’ve bought. Don’t turn this into regret over what you have. In my case, I have much more beauty in my life now, and that makes me happy. But it won’t make me feel more beautiful to purchase things. That’s a big difference, and one that I must recognize when I make purchases in the future.

We Have Failed As A Society

I’m sad to type this, but I also hope this blog entry, and many more like it, will be an agent for change in the future. We have failed. Instead of teaching kids that their worth comes from within, we’ve given in to the marketing bandwagon’s “emotional blitz” and bought stuff that we thought would make us happy. Yet we’re just as depressed as we ever have been.

Personal finance bloggers and financial columnists miss the mark when they write, “JUST SPEND LESS THAN YOU EARN!!” It’s not about that. Those daily lattes the financial columnists love to target as a key component of being frugal…when we buy them, we aren’t thinking about the $4. We’re thinking “This latte will make me more happy (somehow).” Spending less than we earn won’t make us happy in the same way, and that’s why, despite the plethora of financial advice available, most of us are still in debt.

Once you identify what emotional need your purchases are fulfilling, you’ve made a huge breakthrough. The next step is figuring how to make investing and saving money fulfill that need just as much as the latte, cell phone, or new car does. This is something we all have to step up and do. We need to figure out, as a society, how to live emotionally fulfilled lives without resorting to spending. Until we do, no matter how much we earn, we’ll still be in debt up to our ears.

No, this isn’t some “get rich quick” scheme, and it doesn’t require anything illegal or immoral. It’s actually quite simple. The one catch is that it’s easier to do earlier in your life. But it’s something anyone can do, and is easily within the range of most Americans. You have to follow some rules to make this work. But once you do, you’ll be a millionaire.

What is the decision?

Buy a cheaper car, and invest the difference.

Yep, that’s it. Let’s break this down: how does buying a cheaper car make you into a millionaire?

For this exercise, I am going to assume you are 30 years old, and you want a million dollars by the time you are 70. Let’s also assume for the sake of argument that you are interested in a car that costs $35,000 new, and you have little or no down payment. This seems fairly accurate given the data I found from Edmunds in 2004 that states that the average new motor vehicle MSRP was $30,841 in December 2003. We can safely assume that number has gone up since then. Factoring in taxes and licensing, $35,000 seems a reasonable estimate of what the average new car costs.

$35,000 over 6 years, at an interest rate of 8%, is $613.66 per month. Whew, that’s quite the car payment! But it’s similar to what many 30-year-olds have.

Where does the million dollars come in? Spend $24,000 on that car instead of $35,000, which you can easily do by getting a used car or a slightly cheaper car. Your car payment over the same term is $420.80 per month, or a savings of $192.86. Round that up to $200 per month, and put that $200 per month into a mutual fund earning 10% per year. Here’s the catch: You have to invest the extra $200. You can’t blow it on food, TV, music, etc. I strongly recommend you find an investment service that will take the money directly out of your paycheck so you won’t be tempted to spend it.

Once you’ve done that, find a mutual fund that will give you high returns on your money. This shouldn’t be too hard. If you’re unsure, the S&P 500 index has returned an average of 10.30% over the past 30 years (1976-2006.) Pick a S&P index fund, put $200 in it every month, and leave it alone!!! for the next 40 years. Let the compound interest magic work for you.

Invest $200 a month at 10% for 40 years, and you will have a cool $1,168,444.35 saved up for retirement. If you are still having trouble deciding what you want to do, I recommend you visualize a pile of $1.1 million dollars in cash and a used car on one side, and a brand-new car on the other. Which would you rather have?

Here, I’ll help you out:

2003 BMW 3-series (approximately $24,000 used) and ONE MILLION DOLLARS IN CASH!!!
  

2007 BMW 3-series (approximately $35,000 MSRP) and what you will be stuck with
  

I’d pick the $1.1 MILLION DOLLARS IN CASH any day.

I am sure some of you are saying, “But Erica, spending $35,000 on a car is ridiculous! I would never do that.” Well, good for you! Seriously. Now go invest that $200 anyway. Which is more interesting, a couple pairs of shoes or $1.1 million? 10 DVDs, 5 of which you’ll never watch again anyway, or $1.1 million? You get the idea!

Go set up that investment fund, and go set up your paycheck to deduct into it. If you’re self-employed, set it up to withdraw from whenever you pay yourself. In 40 years, when you’re living the high life, you can toast me from the helm of your beautiful boat that you bought with your spoils.

Photo credits: BMW photos by xrrr. Cash photo by noahwesley. Sad Mac photo by Inkington. All photos licensed under Creative Commons.

I took an intro class and talked to several Forex traders, including at least 2 people I know personally who have made over $1M in Forex trading. So, as a client asked me on the phone a while back, “Erica, I read your blog and I just wanted to know…is Forex trading a good way to make money?” My answer is YES…but with some major caveats.

After studying Forex for a while and doing some trading myself (although unfortunately never doing real money trading, as the trading platform company I was using went bankrupt), I came to the conclusion that you can make serious money with it. 2005 was an interesting year to trade — this year would have been even better. Let’s see, bet that the dollar will lose value, go long, and you would have made a huge return this year!

One myth I would like to bust about trading is what some tell you: “Oh, it will only take 15 minutes a day to trade.” Well, right, that’s true — after you’ve spent a lot of time learning how to trade, picking a trading platform, learning the intricacies of your particular trading platform, and reading the news. The trade ramp-up period is a good month or two of reading and studying at least a couple of hours a day. I spend another hour a day reading economic news, and mostly from sources that I hand-pick, not general news sites.

What does it take, then, to be a successful trader? I don’t think a successful trader is necessarily the crazy-stressed type of person you see on TV or in the movies. (But then again, most geeks don’t wear pocket protectors either! ) I’ve thought about this a lot, talked to others who are successful, and talked to many who have not been successful, and I’ve picked up some interesting patterns. Here are my 3 cornerstones of successful traders:

1) Successful traders love to read. This is the #1 trait I’ve seen in successful traders that doesn’t really show up in unsuccessful traders. You have to have a passion for reading. Why? Because there is so much information out there that you have to sift through. News sites, newspapers, blogs, trading books, economics books, pundits, trading newsletters, trading forums…the list goes on, and on, and on. Don’t be intimidated, though. If you love to read, and enjoy learning new things, you have two of the basic skills it takes to be a good trader.

2) Successful traders are quick to discern patterns and cut through the bullshit. If you’re interested in trading, you’ve probably read the old adage that good traders don’t trade with their emotions. I’d take this a step farther. It’s not just about cutting out emotions, although that is a part. It’s about being able to sniff out patterns and realize why other people are saying what they are. In other words, to be a good trader is to be somewhat of a psychologist. If someone is saying the real estate market can only go up, who are they? What do they have invested? I use the real estate market as an example since I follow it as a hobby and I’m amazed at the amount of crap that gets spewed by people who want to sell you a house or a mortgage. Of course the market can only go up from here, because if it goes down, you won’t want to buy a house, and they won’t make any money!

Mainstream news stories often try to offer a “balanced” viewpoint, which stinks to high heaven to me. On one side you have an economist who works for a company that doesn’t care much where the market goes, because they make money either way, and he’s saying this country is headed for a recession. On the other side you’ve got someone from a home mortgage company saying no, of course the economy is just fine, and please won’t you spend that money, because some of it might go into his pocket? This is ridiculous and you, as a trader, have to be on the lookout for biased news sources. I strongly advise you to stay away from the Reuters and Associated Press articles as a trader and dig deeper. I will write another blog entry on this that goes into more detail, but for now, just be aware of the bias that goes into “balanced” opinions in the mainstream news. Do a web search on the people in the article. Who do they work for? What incentive do they have to say what they do? Take this into consideration when you make your trades.

3) Successful traders are quick to admit they’re wrong, and equally quick to do the opposite of what most people would. Keeping your emotions out of trading is good, yes, but equally important is keeping your ego out of the trade. Set your stop losses correctly. If you’re in a losing trade, don’t try to save face or convince yourself it’ll turn around. There are always winning trades to be made. Get out, cut your losses, and move on.

On the other hand, I also see traders quick to succumb to groupthink. For instance, last week a trading newsletter I subscribe to recommended buying a November option put on Standard & Poor’s Depository Receipts (traded as SPY.) To translate that to plain English, the newsletter was recommending I buy an option to sell SPY shares at a certain price (that’s what a “put” is), which means he thought SPY was going down. “November” just means those options to sell the shares will expire this month, so the newsletter writer also thought SPY was going to head down in a major way soon. There was no doubt in my mind that this was a risky play. He’s saying the S&P Depository Receipts, an index made up of major names like Microsoft and Bank of America, is going to go down in a major way. Aren’t we in a market that’s going up pretty quickly?

Nevertheless, I executed the trade in my trading software, and lo and behold, the option price doubled in the past week. I picked up about $400, and I’m still in the trade, so it could get better. The most I could have lost was about $400, so it was a low-risk play.

Sometimes betting against everyone else is the right thing to do — as it was last week, when the market was volatile based on conflicting reports of better jobs (a small positive) and the Fed saying they didn’t want to lower interest rates again (a huge negative.) But you have to know why people are betting the way they are. Then, when you think market sentiment has gone too far in one direction, you can make a lot of money going the opposite way. It’s tough to time the market, but don’t let anyone tell you you can’t do it. The market, ultimately, is made up of people — and people tend to follow other people. Watch the market, read the economists’ comments, and make your own decisions. There’s no better test than to figure it out yourself and learn.

The #1 mistake I see people make is to get talked out of the market. I often hear, “It’s impossible — the only companies that make money in the market are huge corporations.” Hogwash! Sometimes big corporations are in trades to hedge their bets, and often they can’t move as quickly and as nimbly as you. Witness the corporations stuck with near-worthless subprime mortgages who can’t sell them because it would set off a firesale chain reaction in the market. Can you beat the market? Only if you think you can, and only if you ignore those who tell you you can’t. If you study, learn, and devote time to it, yes, you can make money…a lot, or a little, and you can start with as little as $200 or so.

I plan to post more about trading in the future. This is an exciting time to trade, and I hope you can get into the market and play. Feel free to post your results or questions here, and I’ll do my best to answer them.

Someday (I assure you) this will all go in a book. But for now, you can read it first, here… my story of becoming a millionaire at age 26, and how I’ve almost lost it all, and how it almost never got started. Fear, courage, anger, passion, frustration, joy — you will experience all of these things should you decide to embark on a path of fulfilling your dreams. I can assure you that it will be worth it, and help you through the bad times. Hopefully you can learn something from my mistakes, and be inspired by the true stories of how I did what I did.

First, where I am now: My company, Simpli Hosting, which I started just after turning 20 years old, today has 7 employees and a few hundred customers, who on average pay a few hundred dollars a month for dedicated servers or colocation from us. Today I’m 26 and my company is valued at approximately $1.1 million. It was bootstrapped by me with just $15,000, and I own 91.5% of the company. The other 8.5% is owned by two people: one of my best friends in the world (Seth) and one of my most loyal employees (Sohrab.) I never took on any investors or venture capital, and strived always to make the company profitable while still offering reasonable prices to our customers…a message which I believe has come through to all who know me. I put my heart and soul into my business for 6 years, and now it’s time to write the whole thing down so you believe, at the end of reading what will become quite a book, that you can do this, too.

You’ll often hear it said that entrepreneurs are fearless. Let’s start, then, with the biggest fear of any entrepreneur: FAILURE. I like starting here because it’s a fear we all share. Remember this, when looking across the table and seeing other small business owners there, who may become your customers, investors, or mentors: They have all looked in the mirror and thought “What if I fail?” You share this with them. It’s the (mostly) unspoken bond between you and every other business owner in the entire world.

The best thing I can advise to get over this fear, then, is to set up an environment where you are not allowed to fail. What do I mean? My next piece of advice will be controversial. It goes against most of those startup “rules to live by”, and your accountant may turn slightly green at this… but it’s the only way my company would have ever turned into a full-time job and a million-dollar moneymaker. I set up an environment where I could not fail. If I failed, I would be out on the street. If I did not close deals, I wouldn’t be able to pay rent. I had very little money saved up (about $8,000), and took $20,000 from my parents and promptly invested it in my company. That $8,000 was only enough to live on for about 3 months. That was the key — if I couldn’t get the business off the ground in that time frame, it wasn’t going to happen for me. Lo and behold, I made it work, but there were definitely some scary moments!

How does setting up an environment where you cannot fail change your attitude? That’s the key question, and one that many fail to answer. Most entrepreneur/startup guides will tell you to have 6 months of cash reserves in the bank, and so on, and so forth. But what will make you succeed is not, by any stretch of the imagination, related to how much money you have in the bank. Your success is entirely dependent on 1) your attitude and 2) your willingness to listen. Let’s take a look, then, at how being “hungry” for those deals changes your attitude.

1) You quickly learn exactly what your customers don’t want. Having that extra money in the bank allows you to shrug your shoulders and say “Oh well, his loss” when a client turns down your proposal or, worse, stops working with your company. It allows you to point that finger of blame at anyone but yourself. But being hungry (and watching that bank account balance dwindle) forces you to look in the mirror and re-examine exactly what happened. What could you have done differently to save that customer or to get her to sign? Sometimes, realistically, there wasn’t anything you could have done. Someone in their company wanted to do business with a larger (more “stable”) company, or they had hired someone on their team who had other ideas about what needed to be done. But a lot of times, you start to realize that you could have tweaked your pitch, responded more quickly, or treated them more kindly. Perhaps meeting them in person would have helped (hint: it almost always does.) Don’t hesitate to ask, by the way, when a potential customer doesn’t sign or someone leaves… “why?” This will give you a great insight as to exactly what you can do differently.

2) You’re forced to listen to what your customers DO want. I found out that my customers were coming to Simpli because we offered personal service in an industry that’s not known for friendliness. I adjusted Simpli’s website and my sales pitches to emphasize this, quickly weeding out those who just wanted a low price and courting those who valued our service levels. I listened to existing customers, who said “More communication, please!” and started a company blog to keep in touch with our customers, as well as reaching out to them through networking services and sending personalized congratulatory letters whenever I saw them making news headlines.

Let me back out for a minute and tell a quick story. I was reading a popular tech news website and saw a mention of a new company being introduced. I recognized the name of the company owner, who was a customer of ours. However, he only had one small server with us, and his new company was hosted elsewhere. I emailed him, mentioning that I saw his company in the news, congratulating him on the new site, and dropped in a quick line at the end saying “If you need any help from us in the future, please don’t hesitate to ask!”

Later, he decided he didn’t like the huge company where his new website was hosted, and replied to that email of mine, asking for a quote. We ended up signing the deal for his new company in its entirety. Today he spends about $1500 a month with us. That’s because I reached out — not with a sales pitch, but with a “Hey, congratulations!” People like to be recognized. They love that you’re paying attention. And they’ll shower you with business if they know you’re supporting them 100% in their new venture. That doesn’t mean that you necessarily have to invest in their business, or think it’s the hottest thing since sliced bread. Just show that you recognize that they’re out there, trying to accomplish something and that you wish them success, and they will respond in kind.

That’s one of the most valuable lessons I learned about business. Being hungry to succeed means listening to your customers. It sounds simple, but it’s all too easy to point fingers and make excuses instead of thinking of your business as a fantastic learning experience.

More of this series (much more) to come soon!

Let me preface this by saying that I read a lot of blogs. I spend hours a week reading blogs, and I consider most of them part of my work time. Blogs help me know what the trends are. Blogs help me know what our customers want (I read several of our customers’ blogs.) And most importantly, the really good blogs out there fairly often provide insights that I just wouldn’t have had otherwise.

This is pretty much what happened a few days ago when I read Tantek’s blog about human interface design. Basically, he stated that one of the reasons Twitter is so popular is that it only has one text field where you can enter anything you want and it’ll get broadcast to your friends. I am also powerfully drawn to the simplicity of Twitter (btw, I’m ericabiz on Twitter and you can click there to add me and follow me around.) The reason why people who are into Twitter are Twittering tens or hundreds of times more often than they blog is because blogging, for most, is a large effort: Log into your blog software, then click the create post link, then type a subject, pick categories (I hate categories) and then blog, proofread, blog, proofread, blog, proofread, and finally post. Then you have to watch for spam on your blog and make sure your friends’ comments aren’t getting marked as spam. Frankly, this is a large effort to go through even though companies like Wordpress try to make it a lot easier. That means that most of the people who blog on a regular basis actually enjoy writing and find it rewarding enough to jump through the hurdles…like me. There are, however, hundreds of things I just don’t have time to blog about, or I can’t make long enough to fit into a blog post…so I Twitter them instead. This is a powerful recognition.

Jeff Lindsay, one of our customers and also a friend of mine, has also been blogging some really good stuff lately. In particular, I’m thinking of his recent post regarding open source web services. Jeff thinks virtualization is the future of web hosting, and mentions so in that post. I happen to agree, but in a long term, meta way, not in an immediately practical “I can host my web server on a cluster and it’ll be faster and cheaper than hosting it on a dedicated server today” way. (We’ve run the benchmarks, and with today’s technology virtualization is both more expensive and slower than dedicated servers. That’s not to say that won’t change in the future, however.)

Jeff also brings up utility computing, which is the trend that’s worried me most about hosting. Amazon has introduced their EC2 computing service, which allows you to buy all the gigabytes and megabits you want on an as-needed basis. That means Amazon and other large companies are gearing up to turn web hosting into a utility that you turn on and pay for as you use, much like electricity or water. This is good in some respects because the centralization of these services is lowering the barrier to create and distribute web services. But these services are also evangelizing that web hosting is about bits, bytes, and cost per unit. I feel strongly that the removal of people from any industry leads it down a path that we as a society don’t want to go down — that the more we dehumanize services, the more that we forget that we are, indeed, creating and distributing these services for other human beings. The more we make any industry all about costs, prices, and numbers, the more we lose focus on moving society to a better place together as a whole and helping other people, and that’s why I fight the trend toward making web hosting into a numbers game.

That’s getting pretty tangential, so I’ll get back to my point. The third fortuitous thing that happened was that I again picked up and began reading The Science of Getting Rich today. This book is highly recommended if you are interested in being rich by delivering value to others instead of by taking away or competing with others. It showcases a step-by-step method to having everything you ever could wish for in your life without feeling “guilty” that you have money and others don’t…and it shows you how to make others rich as well, so they don’t have to feel guilty or bad either.

Relevant quote from the book: “The normal desire for increased wealth is not an evil or reprehensible thing; it is simply the desire for more abundant life — it is aspiration.” Powerful stuff, and if you resonate with that sentence, I urge you to go buy the book and read the rest of it.

I had three things in my mind at that point: Tantek’s blog, and with it a realization that I needed to change Simpli’s website to make it much easier for those who need web hosting to order from us; Jeff’s blog, and a general agreement with his assessment of the future, but also a dissatisfaction of the hosting industry being turned into a numbers game of “who can deliver me the most gigabytes and megabits for my money?”; and The Science of Getting Rich, which (among many other things) states: “In so far as your business consists of dealing with other people, the key-thought of all your efforts must be to convey to their minds the impression of increase.”

That sentence hit me like a lightning bolt and shifted my perspective dramatically. It hit me so hard that I had to put down the book and start sketching out a new website for Simpli. What does everybody want? To be more successful! Why do they want to change hosting providers, or to start a new business which will need a hosting provider? To be more successful; to make more money; to serve their customers better! Then why is every hosting provider talking about gigabytes and megabits?! Why does our website say “100% uptime” on the front page? That’s a great thing, but it doesn’t convey to our customers what they really need!

So, do you know what our new website is going to say? Right on the front page, it’s going to say “We help your business grow and succeed.” And we’re no longer going to have categories like “Dedicated servers” and “Colocation” (although we’ll have links to those so people who are looking for something specific can find it quickly.) No, instead we’re going to organize it by business category: “Startup”, “Growth Mode”, and “Advanced.” And we’re going to offer an hour of consulting, either in person or on the phone/Skype, before you buy a hosting package from us, to make sure you’re getting the right hosting package that can scale with you as your website skyrockets to popularity.

Why? Because that’s what you want. You want to run a more successful business. You want to leverage the Web and email to make you more money and to make your customers happy by delivering them more value. And we want to help you do that. No more gigabytes and megabits on our front page. No more competing on price. We’re here to deliver you more value than any other hosting company out there, and we’re here to turn the slow slide of the web hosting industry into a numbers game on its head.

The new website will be up by April 1, 2007. I’m ready to make Simpli living, breathing proof that the world, and particularly the computer industry, is built on human interaction — on serving people — and not on numbers. In other words, I’m changing the world. Again.

This entire health issue has led me to a deeper realization, which I wrote in an email to S this morning, and after some thought, decided to post here. This is what I wrote to him, verbatim (except that names have been shortened.) I hope that it will bring some of you to a deeper understanding as well.

As I understand it, we are not much more healthy than we were as a culture thousands of years ago. Sure, we may live longer, as a consequence mainly of better nutrition and recognition of certain cause->effect relationships (washing hands regularly->fewer contagions enter the body). But we are not, as a whole, healthier on a day-to-day basis.

There is a deeply ingrained belief system in our culture that we must go to a doctor (a professional) to cure all ills. You and I now know this to be just one of many paths. For instance, there are many ills that can be cured simply by realigning Self with Nature and Source. In particular, those “common” afflictions such as colds and infections can be cured without the need for a doctor.

Yet our culture, this one, the one that we live in now, insists to us that we must see a doctor to cure these common problems. We are constantly being reinforced by TV ads for medications, our own parents who have the same belief system, and by friends who think they are just telling us to “do the right thing” and go see a doctor to get “cured.”

I was not aware how deeply ingrained my belief system about doctors was until today.

There were several things I could have done to not make these boils as bad as they were. I needed to realign myself in even a deeper way than I had already tried to. I needed to ask for healing on a daily basis and receive it. I needed to do simple utilitarian chores like changing my sheets and washing my clothes. But none of this did I do until today, when I finally saw a doctor, and realized that subtle changes after the doctor visit had taken place. In particular, I felt that I was healed. This, more than anything else, will cure the boil.

Now you and I will recognize a very important lesson, albeit not without a significant amount of discomfort and pain that I have been through in the past several weeks: that those people who claim that alternative medicines do not work, who believe that the natural cures so well-researched and in use for thousands of years are lies, have such an ingrained dominant belief that doctors will cure them that truly, only doctors are able to cure them. The fact that I was not aware of this ingrained belief system in myself until today shows how far beneath the surface it lies; so far that most, when reading what I have just typed, will write me off as a quack.

This system was reinforced by my parents, who see doctors on a regular basis, by M, because his belief is so far dominant that he can’t even think of doing anything else, and even by you, L, and others who said “You might want to see a doctor about that.” And, in the mindset that I had and have, that is correct. It was the only thing that cured me.

I fought the doctor visit not for true root belief, but for fear of visiting the doctor, which is the wrong approach and an excellent way of treating myself to more misery when I finally did go to the doctor.

Now I have two choices: I can either wipe out the entire ingrained belief system that doctors will cure me, and I will not need to see them; or I can embrace my belief system, understand that it is a belief, but not a totally bad one, given the options, and go to the doctor quickly and get things cured instead of letting them sit around in me for weeks. No other path will work, because any other path is simply rejection of one of the two above paths.

It is an interesting dilemma, with each having its own rewards: the main reward of the first path being that I will feel more in control of myself and have more harmony, but will be difficult to fully embrace given our culture; or the second path, an acceptance of the primary belief system in our culture and tacit acknowledgment and nod to those who have created this culture. The second one will put me in better harmony with those I choose to help, since they are here in this culture; the first will put me more in tune with myself and better able to regain health quickly so I can help more people. The first, of course, is a much longer road than the second, because tearing down an ingrained belief and then rebuilding it from scratch, especially with the poor documentation of alternative cures that this society has, will be difficult and time-consuming.

This was an excellent realization for me and one, I hope, that I will not have to realize again in the way that I did this time around.

First of all, most of my predicted bubble headlines for 2007 are still making news. I don’t wish to change any of them, and I’m sticking with those predictions for now. A few more recent stories that jibe well with my predictions (and we’ll see more in 2007!)

• Looks like Fannie Mae may take down KPMG with it, as this Titanic grasps at (sues) everything in its path before finally sinking. KPMG out of business? Maybe, maybe not…too close to call at this point. If I had to guess, I’d say the lawsuit will be thrown out and/or KPMG will emerge “victorious” — but battered.
• Florida’s still shaping up to be a disaster. Despite a quiet 2006 hurricane season, Florida’s houses are dropping in value at an astonishing rate, and wind insurance is playing a huge factor in that decline. From the linked article: “Insurance companies dramatically raised premiums after Hurricane Katrina. Depending on where they live and their policies, Florida homeowners may pay as much as 10 times more for flood and wind insurance than last year; premiums can exceed $30,000 per year on mansions.” Woof.
• Naples, FL seems to be “ground zero” for home price declines, taking the one of the largest YOY (year-over-year) price declines for a major market. From the article: “Median sales prices for homes dropped by 13 percent from $479,800 in November 2006 to $415,200 last month.” I’d hate to be someone who bought in 2005. Foreclosure, anyone?
• Ah, yes, and speaking of foreclosures, that’s going to be a popular news item in 2007. Watch what’s happening in Denver now for a preview of what California will be like in 2007 and 2008. Bloomberg says “About 20 percent of sub-prime mortgages granted in the last two years will end in foreclosure as owners struggle to make payments and home prices stagnate.” A reminder that more than 60% of the loans granted in California in the last few years were “payment option” or “adjustable rate” mortgages — exactly the kind of loans that were offered most often to sub-prime borrowers. By 2010, 1 out of every 15 borrowers in California could lose their home to foreclosure. That means, if you live in California, you’ll likely know someone who was foreclosed. The really unfortunate part is that most of these borrowers have no equity in their homes, so there’s no good reason for them to try to hold onto their house. They’ll just give up the keys and walk away…and the “investors” who bought piles of subprime loans on Wall Street will take the hit.
• Speaking of mortgage lenders…how are they doing these days? Well, if the last month is any indication, most of the subprime mortgage lenders will eventually either be sold at cut-rate prices or simply close their doors. OwnIt Mortgage Solutions became one of the first lenders to go out of business last month. That company provided thousands of loans to subprime borrowers in California. There will be more…many more.

I’m now going to go out on a limb and make a few bolder predictions not just encompassing 2007, but the rest of this decade. The oft-mentioned retirement of the Baby Boomers is almost upon us. By 2010, most of them will retire. Or will they?

You see, a lot of those Baby Boomers put all their wealth into dubious investments like overpriced real estate. I’ll use my landlord as an example, but there are millions more like him. In 2004, my landlord had a brilliant idea to buy a bunch of overpriced properties in the Bay Area and rent them out as his retirement strategy. Unfortunately for him, the fundamentals didn’t really make sense, and he’s been losing money on most of them. The rental prices he gets are break-even with his mortgage payments, but by the time he factors in repairs and property taxes ($6250/year on the place I’m living in!) he’s underwater by a significant margin. I assume he expects to sell for a profit (”real estate only goes up!”) to fund his retirement. He’d have to do that in the next 12 months, though, to make much of a profit (if any) and it looks to me like he’s planning to sit on them for a while longer.

Baby Boomers who bought into real estate (or, increasingly, even the stock market, which is fairly overvalued right now as well, though I don’t expect it to crash in 2007) to fund their retirement will be mostly out of luck when they decide to cash out in 2007-2011. That means that the much-vaunted “worker shortage” due to baby boomers retiring will most likely be nonexistent. Remember all those scary charts that projected a massive worker shortage by 2010? I don’t think you’ll see that as the case, with baby boomers going back to work (or not retiring in the first place) because they need so much money in order to survive. Unfortunately for them, most of the Boomers are very consumerist, meaning a “simple” lifestyle is not an option, and thus they will work well into their 70’s in order to continue to feed their lifestyles.

Speaking of “simple” lifestyles, as the economy tanks over the next few years (first real estate, then industries directly related to it like mortgage brokers and construction, then industries feeding the home industry like Home Depot and Lowe’s, then furniture stores, then service industries like plumbling, then businesses who sell to those businesses…creating a dramatic ripple effect through the economy), the “simple”/”frugal” lifestyle will start to come back into vogue. This is the time to take advantage of that trend and start a website, blog, or whatever else you want devoted to some niche of that lifestyle.

If you’re not the entrepreneurial type, I recommend holding off on major purchases and focusing on paying down debt as quickly as possible. Be long in cash and commodities and short in bonds/CDs (no reason to go long in bonds with the inverted yield curve.) Cash will be king once the stock market grinds to a halt (probably in late 2008-early 2009 or perhaps later…hard to forecast at this point.) Even now, there is not much to be made in mutual funds/stocks unless you trade (and trade well/do your research) instead of hold.

I’m also predicting that something major will happen to Lowe’s or one of the smaller home improvement chains. I believe a buyout/merger is imminent in that industry.

That’s a rap for 2006, and some guidelines on how to make money in the coming years. I’ll post more ideas as I have them (and I do have them!) Expect more blog posts from me in the New Year as I integrate blogging into my daily routine. Enjoy the rest of 2006!

• Ritz crackers, Wheat Thins, and saltines. Strangely enough, several varieties of crackers contain high-fructose corn syrup. Also, watch out for it in breads, including some “healthy” wheat breads. Alternative foods: Find crackers/breads in a store near you that advertise “all-natural.” I found a line of Annie’s brand crackers that advertises itself as “totally natural” and does not contain HFCS. Other smaller brands typically do not contain HFCS.
• Yoplait yogurt. Another bizarre place for HFCS to show up — not quite as unexpected as crackers, but strange for a product that bills itself as health food. Look for yogurts advertising “natural” or “organic.” I found Clover organic strawberry yogurt, which is about the same price as Yoplait. It’s definitely not as sweet, but it still tastes good and it does not contain sugar (except for the natural sugar found in the fruit) or HFCS.
• Heinz ketchup. This one really stymied me. There are natural ketchups out there, but they do taste different and my body has adapted over the years to thinking Heinz=ketchup. For now, I’ve decided to stop eating ketchup — or to eat it in very small quantities when I do eat it. As I try out different ketchups, I’ll blog my results.

So why give up HFCS and sugar? Well, for me, it’s eliminated the crazy blood sugar highs and lows I had as a result of my hypoglycemia (as described in my previous blog entry.) Also, it’s forced me to really think about what I eat instead of just stuffing food into my mouth. As a result of my new diet, I have lost 3 pounds in the past month. Since I wasn’t overweight to begin with, 3 pounds was a significant change — people noticed and commented. I’m curious to know where a long-term application of this diet will put me in terms of weight.

I also feel I should point out that I do allow myself 1 dessert a week – typically on a weekend. It’s important to not feel completely deprived on a diet like this. I don’t want to develop a bitterness or a resentment toward how I eat. The 1 dessert a week allows me to reward myself when I want to, while keeping in mind that my overall strategy should be toward less sugar.

Here is a more complete list of foods containing high-fructose corn syrup. If you would like to remain healthy, I suggest you avoid these foods — particularly those where there is an easy substitute.

The real estate boom is over. Toast. Dead. Done with. That’s already starting to hit the mainstream news. But the really interesting news is the shocking stories that will appear once the largest real estate bubble we’ve ever had turns into the largest real estate bust we’ve ever had, and it’s a bust that will likely send our country into a spiraling recession.

Let’s start with Florida. Florida will turn into a complete disaster area in the next year… if not by hurricanes, then by ridiculous overbuilding, oversupply, and glut of condos. That old joke, “Why are Florida condos like STDs? Because you are stuck with both for the rest of your life.” will resurface. The ridiculous price of hurricane/wind insurance (even inland!) will result in a lot of Florida condos (and some houses) that will not be able to be sold at any price.

Other markets that you’ll see break in 2007 include San Diego, Las Vegas, and Phoenix. All of these markets have been overbuilt so much that price declines of 50% or more by 2011 are likely. Here are some inventory numbers from Phoenix. Available homes for sale, May 2005: ~5,000. Available homes for sale, July 2006: ~55,000. Vegas is just as bad, with greedy developers snatching up everything within 5 miles of the strip to build condo towers on, and investors who will not be able to bail out of the condos they bought at overinflated prices. San Diego has 3,500+ condos that are being built right now. (Folks, $300,000 for a San Diego condo is soon going to seem as ridiculous as buying dot-com stock for hundreds of dollars a share. Bookmark these links for a good, hearty laugh in 5 years.)

The other thing you’ll start to see surface that is directly related to overbuilding of houses and condos is developer lawsuits. Pretty soon, some of the “investors” that bought condos at ridiculous prices and realize they can’t sell for even 70% of what they bought the condos for will start suing the developer. Claims? Anything from shoddy construction (oh, and you’ll find some nightmarishly bad construction on some of these condo units…they were slapped together at the peak of the market as quickly as they could be) to false promises regarding a return on investment that never materialized.

Let’s take a look at realtors, mortgage brokers, and the others who make their living in the real estate market. Did you know that 70% of the jobs created post-dot-com-boom in California are NOT in high tech, but in real estate? How about the fact that there is one Realtor(R) for every 55 people in California? At least half of these people will be out of work by 2011. Also, mortgage brokers and mortgage lenders will go out of business fairly quickly (perhaps aided by more lawsuits from angry buyers that were sold false promises.)

Here’s what may be the worst headline in 2007. Fannie Mae earned $10 BILLION less than they stated in their 2004 earnings report. What does that mean for us? Fannie Mae and Freddie Mac are two of the largest holders of mortgages in the country. They are allowed to borrow money at interest rates lower than any private company due to the assumption that they will be bailed out by the U.S. government if they go under. The problem is that this implicit (NOT explicit — Fannie/Freddie loans do have a disclaimer stating that the government does not guarantee their loans) assumption has allowed corruption to reign supreme. Earnings were ridiculously overstated. Then the executive management paid themselves huge bonuses based on the fraudulent earnings. This has “Enron” written all over it.

If the government does end up needing to bail out Fannie or Freddie due to massive corruption imploding them, our U.S. dollar will tank relative to other currencies. The dollar has remained strong because foreign investors keep pumping their money into the American economy. If a real estate bust and/or a Fannie or Freddie bailout happens, foreign investors will seek other countries to increase investment in, further sending the dollar down. Note this recent article regarding the dollar, which has the following quote:

“The dollar will no longer enjoy the benefit of consistently rising interest rate yields and will now have to compete on U.S. economic performance alone.”

U.S. economic performance is likely going to be very poor over the next 5 years — and perhaps longer. If you want to make money on this, bet on the dollar to be weak and hold a long position. Buy currencies of countries you think investors will want to invest in. You will come out ahead.

Finally, let’s head back to the local real estate scene. Here in the Bay Area, inventory has increased, but prices have remained fairly steady. With 30% more homes on the market this year than last year, and houses taking longer and longer to sell, the next move is a price drop. And drop they will. Prices have been disconnected from fundamentals for years now. (Read that link for an excellent, in-depth description of why the current housing market in the Bay Area is unsustainable.) But if you want the quick run-down, here are a few facts:

• Housing supply in the Bay Area, per person, is significantly larger now than it was in 1999. Normal laws of supply and demand state that prices should have gone down from their 1999 levels. They have not.
• Developers are still building condos, condos, condos. Have you been to Emeryville lately? And they are building thousands more condos near Jack London Square in Oakland…a quick drive or BART ride to San Francisco.
• Population has been decreasing here since 1999. One friend of mine is sure that San Francisco real estate prices will remain at their current bubbilicious levels due to population growth. It’s not his fault he’s been sucked into this myth; it’s the same line we’ve all been fed by Realtors(R) and others who make their living selling houses. I’m sorry to say that this is a myth. The population of San Francisco was larger in 1950 than it is now!

• 1950 San Francisco population: 775,357
• 2005 San Francisco population: 739,426
• Uh-oh.

I predict at least a 35% decline in housing prices (overall, average) from 2005 prices for the Bay Area by 2011. The hardest-hit areas will be outlying areas that rely on commuters to make the numbers work. As commuters see gas prices go up, up, up, the advantages of paying less for a house decrease. Sacramento will be hit extremely hard due to too many single-family homes being built. Tracy will be hit hard. Places that will be hit less are places close to where people work and/or close to public transportation other than buses. For instance, houses close to BART stations should retain more value than those where you must drive a car to get anywhere.

Condos will be hit worse than houses. There are more condos being built right now, but more people desire single-family homes. Those looking to “move up” from a condo to a SFH (single-family home) may find themselves trapped in a condo that is worth less than when they bought it — if they bought it later than 2001.

So when does the real estate bust finally end? It’s hard to say, but you can use this guide as a rule of thumb. Take the rent that you would be paying for an equivalent place and multiply by 200. If the house you are looking at costs less than that, it’s probably a good deal. Doing the math on the place I live in now, we find the magic number to be $570,000. My landlord paid $625,000 for the place in 2004. It is now worth approximately $800,000 (if he could find someone to buy at that price — duplexes are not hugely popular here.) A 35% decline over the current “high-water” $800,000 price puts the duplex at roughly worth $520,000.

This duplex sold for $325,000 in 2000.

This is why 35% price declines are not unreasonable. $325,000 in 2000 to $520,000 in 2010 is a 62.5% price gain in 10 years, or 6.25% per year, which is still over the historical average for the Bay Area. That means by the time we overshoot the bottom in 2011 or 2012, it could well be that this duplex would be valued at only $450,000…or less.

And time goes inexorably on…

As Simpli celebrates its fifth anniversary, and I celebrate having built this thing from practically nothing and marvel at how large it’s gotten (I can’t believe we’re about to book our millionth dollar of revenue!), I feel it’s time to start properly documenting the journey I’ve had and my rules for starting a successful business.

I’ll take a step back now and expand on a little bit about why I started Simpli and why the heck I went into web hosting instead of [insert other business here].

Interestingly enough, the signs usually tell you when it’s time to start your own business. I officially claim the “start date” of Simpli as July 27, 2001 — the day that I signed a colocation contract in San Francisco for a company I then called ShakaDesign.com. At that point I had a few friends hosted on a box at my house; I had colocated servers before and even charged for web hosting before, but that was the day when I decided to make it official and say “Hey, I’m actually going to run this as a business and have colocation expenses and whatnot.” The colo expenses were a little over $100 a month, and I figured that if I had enough profit to pay my cable modem bill every month, I’d be doing well.

I worked at Sun Microsystems at the time, having worked for Cobalt Networks (little blue boxes YAY!), which then got bought out by Sun. I loved Cobalt; in fact, Simpli’s first 4 servers were all RaQ4s. I hated working at the Sun monster. (I think I’ve blogged about that plenty… suffice it to say that a corporate culture built on negativity and a complete disdain for the simple-but-elegant Cobalt user interface forced me out of Sun pretty quickly.) I figured that my ticket out of Sun Micro would be web dev and consulting, which was my biggest passion back then. I was an expert PHP developer by that point, so in my free time I hung out in #php on openprojects.net (now freenode) and solicited web hosting clients there.

In May 2002 I finally found my way out of Sun for good, spurred on by one of Sun’s weird programs where they paid employees to leave (I took an option to leave and got paid severance, as I guess they figured giving people the option to leave was cheaper than forced layoffs. And I’m happy to say I QUIT!!!) I also took a web dev contract with a company that would pay me enough to survive the summer. And that’s how it went — Sun Micro was my last “working for the man” position, and I’ve been on my own ever since.

I really thought web dev would be my primary job for years to come and web hosting would continue to be a side job. I figured I’d just host my clients, make a few hundred extra bucks a month, and be happy with that. Except that my web hosting clients were growing… and they wanted to pay less for consulting, but more for web hosting. The beginning of 2004 came around and I did my financial wrap-up for 2003, and here’s what I found:

Income from Simpli: $22,744.00
Income from consulting: $21,447.58

I was taken aback. Here I was spending 70-80% of my time on consulting and only a tiny fraction of my time on hosting, and hosting was making more money. Of course, hosting had more expenses. But I quickly realized that even with more expenses, hosting was the right way to go. Within two months, I had informed all of my consulting clients that my consulting business was shutting its doors and I was going to make Simpli into a pure hosting play. By the end of 2004, I was 100% web hosting, and the company has grown significantly from there, with our first 7-figure year expected in 2007, and 4 full-time employees as of this writing. We have never taken a dime of outside investment — i.e. we have to be profitable every month to stay in business. You’d be surprised how good you get at financial discipline when that’s the case.

So what are my three rules for starting a business? They’re pretty simple, actually, but you’d be surprised how many business owners ignore them. They are:

1) Do something you love. I’ve seen so many start businesses that they didn’t know anything about because they felt like it could make a lot of money, or because they felt like it was the “closest thing” to what they loved, or even because it was just better than the job they had. But the thing to remember is that this is not just a business. This will be your life for a minimum of 2-3 years. Are you absolutely 100% sure that you can wake up in the morning and love what you do? Are you ready and willing to put your heart, soul, passion, love, and work work work work work into this business? If you can commit to this business idea like you’ve never committed to anything in your life, you’ll be fine.

I’ve often heard starting a business being compared to having a child. I commented on this to one friend who is a business owner. He said “Yes, it is similar. But children sleep.”

Businesses don’t sleep. Your clients can (and will, especially in the web hosting industry) call at 4AM. Your sleep will be really fragmented. Things will go wrong 24 hours a day. Sometimes you’ll feel like there is a never-ending shitstorm bearing down on you. And you gotta love that. Embrace it. And realize that it will work out, and someday you’ll be rewarded with multi-millions for all this crap you put up with. You must believe that the payoff is worth it.

Which brings me to point #2…

2) Make sure you have an exit strategy. What is your exit strategy? That was the problem I had with my PHP coding career, for instance. It had no exit strategy. It just had me, doing ever-more work for ever-less pay, as Indian outsourcing came into the picture. Yuck. That’s not the kind of life anyone wants to lead!

Build something that you can disentangle yourself from when the time is right. Don’t build something that you will be stuck with for the rest of your life. My father is 62 years old and still a practicing attorney. He says he’s going to work until the day he dies. He can’t retire because he and my mother require their large incomes (Mom runs a title company) to support their lifestyle. Do not put yourself in this position. Build something that you can eventually sell, or IPO with, or hire and train someone else to run. Build something that will be worth it. Remove yourself from the hours=wages shackles.

3) Love your clients. This is actually a bigger point than I can summarize quickly, but the main gist of it is “Don’t be afraid to shower your clients with love.” This is really, more than anything else, the secret to Simpli’s success. I go out there and I support my clients as much as I can. When things go wrong, I take responsibility and explain what we’re doing to correct the problem. When things go right, I get thank-you notes. I enforce with my staff (sometimes to the point where they say “I get it, I get it!”) communicate, communicate, communicate with clients. I am not afraid to say I love my clients. I am not afraid to show my passion for running my business and to let my clients know, over and over again, that I am fighting for them and their success with every hour of every day, and that my staff is there to back them up. Clients understand that things go wrong, and they’re willing to put up with an amazing amount of crap if they realize that you’re out there doing the absolute best you can, and they see that you’re putting everything you have into this, and it won’t happen again! Don’t be afraid to show the love. People notice, and they appreciate it much more than that stiff, formal crap you see from big companies. You are not a big company. You are you, and maybe a couple other people who work with you. Use that to its largest advantage.

I am a firm believer in people starting businesses. Most people don’t start because they are afraid. They see themselves failing and think they wouldn’t be able to handle that. But I’m different. I looked at it from the perspective of “What do I have to lose?” I was young, virtually debt-free, and I figured the absolute worst that would happen was that I’d move back to Indiana and live with my parents for a while. You should be different, too. Tell those people who bombard you with what-ifs to shove it; that you are doing what you love…so what if it fails? You’re going to do the absolute best you can. And if it fails, the great thing about living in America is that you can just go out and start another company. And maybe this one will stick. Look, no one comes out of the womb knowing what they want to do in life. Things change. People change. Do what you love, show the love, and have an exit strategy and you’ll do fine.