Get Rich By Creating Value

"Goldeagle". Licensed under Public domain via Wikimedia Commons - http://commons.wikimedia.org

“Goldeagle”. Licensed under Public domain via Wikimedia Commons

Wow, I just gave you the secret to riches.  Create value.  But what does this mean?

I was thinking about how to provide people with the tools they need to be successful at making money on the internet.  Sure you can build a website, you can sell products for profit, you can create an online tool, but if you are not creating value… you will not find any real success.  And by success, I mean money, riches, or wealth.

So what is value and how do you create it?  Value is something that means more to somebody else then it takes to produce the something.  For instance, if I have a way to save a company $50,000 on their energy bill, I can charge for the information right?  Yes, the value is the way, or information, to save $50,000 on energy.  Probably worth less than $50,000 and more than $1, but there is a value that can be placed on it.  The only problem is that everybody knows these ideas and many people have written about them, so the value of the information is much lower.

That is the typical problem in network marketing.  You want the easy sell or easy sponsor, so you think it is enough just to tell people you do XYZ network marketing company.   Perhaps if you were the only XYZ network marketing distributor this would work, but you are not.  What value do you provide that nobody else does?

There are ways to provide value in network marketing.  Probably the best one today is your unique perspective on finding leads, staying organized, or creating a group to depth.  People are hungry for information on doing the business so if you have something that works for you, you can let other people know.  Can you sell your information product?  Only if it is truly unique, complete, and entertaining.

Could you just give away your starter kit or offer a money-back guarantee to provide value?  Giving away the kit is a bad idea, because it encourages people to join and do nothing.  A money-back guarantee is good, but easy to emulate.  Tools to be successful in your business are going to be your best avenue for value.

Your value to your multi-level marketing company can be producing sales, no doubt.  How do you produce sales?  Many online avenues for selling are strongly discouraged by MLM companies, and many others do not produce results large enough to support a person.

You can produce network marketing results by either creating a new market or competing with your fellow distributors.  Competing tends to be a bad way of doing business.  We always want competitive advantage where we can get it, but creating a new market will produce much better results than snatching market share away from others.  How do you create a new market?  Reach people that are not being reached, and produce value within that market.  People already need and want what you are selling, but nobody has presented it in a way they understand.  Be the person that does.

How do you create value?

Make Money By Serving Needs

In business, we make money by providing value to our customers.  Value is actually a very wide term, which can mean something as simple as helping the person lose weight by providing them with an easy way to lose weight or it could mean the service we provide to our customers; for example, finding them what they want no matter how hard it is to find.  People are willing to pay for value, but it must be value worth paying for.

Mainly, it is the way we are better than everyone else that sets us apart.  The things that give us competitive advantage.  We can offer a better product, better service, better price, or better customer service than our competitors.  Many of these are hard to do, there are so many competitors out there with great products or services, many are selling at rock-bottom prices, but one thing that many companies forget is how to truly serve the customer.  By serving, I mean putting the customers’ needs ahead of the needs of the company.  For instance, I had a customer that wanted a particular item that I could not get at wholesale, so I ordered it from drugstore.com and shipped it to them free of charge.  Why would I do such a silly thing?  Because the customer will remember it and go out of there way to buy from us in the future.

It can be a difficult concept to wrap your mind around.  Providing heroic customer service just so the customer comes back to you in the future.  There’s no guarantee by the way, it is possible that they will go elsewhere in the future, so your effort may or may not be rewarded.  You may just be giving away the store.  However, most customers recognize great service when they see it and go out of their way to use companies with great service, depending on the price.

And what about price?  If you can give your customers great service, you typically can charge a bit more than your competitors and get away with it.  If you are competitive but slightly higher, but you give far better service, customers will definitely seek you out.

It’s not always easy to give the best service.  At times it can be time consuming and costly, but if 99% of your customer interactions are fairly normal but 1% require heroics, you will make plenty of money and impress your customers.  You really do have to be perfect though.  Any problems whatsoever will tarnish your reputation.  Any mistakes should be cause for lavishing your customer with service and gifts.

Giving great service is an investment in your long-term business, so you may spend a bit more short term for great service.  But long term your investment will pay huge dividends.

Introduction To Valuing Stock

I have always wanted to write an article about valuing stock.  Even though I know somewhat how to find a value, the process is very subjective.  You may have a different opinion about one of the variables from another person, and you can debate the pros and cons of each side for days.  So lets find a simple way to assess the value, and then we’ll look at an even simpler way.

For the purposes of this article, we’ll assume you are buying shares of stock for personal ownership, not as a company trying to acquire another company or something.  A share of stock is a partial ownership of a company.  The value of a share of stock is equal to whatever somebody else is willing to pay for it, period.  That would be the market value of a share of stock.  Any other value really is trying to second guess the market, assuming that the market is acting in an irrational way, which may value the stock higher or lower than it is truly worth.  The truth, though, is that if you figure a share of stock should be valued at $60 and the market value is $40, it’s worth $40.

Determining Actual Worth

Ok, so you think you can out value the market?  Well then, let’s try to find a method of doing this.  Let’s say there’s a corporation with 100 shares of stock outstanding and it has assets totalling $1000.  Is a share of stock worth $10 then?  Nope.  Asset value has no relevance, unless you are going to liquidate the company and are able to actually get $1000 for the assets after expenses.  A better method is to look at yearly earnings per share or yearly dividends per share.

Yearly earnings is the profit the company makes.  Profit is revenue minus expenses.  Revenue is the total amount of money the company takes in and expenses are all expenses of the company.  For instance, if the company purchases an item for $1 and sells it for $2, revenue is $2 and expenses is $1, making earnings of $1.  There may be other expenses involved, but let’s keep it simple.

Dividends is simply the amount of money the company chooses to pay out to their shareholders.  Notice the word chooses, because this amount may be more or less than earnings.  For instance, say the company has a regular dividend of $1 per share but only has earnings of 50 cents during this period, resulting in paying out more than earnings in dividends.  Most of the time though, dividends will be less than earnings.

Neither earnings or dividends are a perfect method to gauge value because one could say that earnings have no value to the shareholder until dividends are paid, but paying out less dividends than earnings results in a build of company assets, probably cash, which could be paid out at a later date or invested in a project which will create more profit for the company.  So growth in earnings may result by reinvesting earnings.

So how to value a share of stock based on earnings or dividends?  Let’s use dividends for this example.  Let’s say that a company pays out 5% of the market value of it’s stock as dividends.  Is this good or bad?  Well it is more than investing in a savings account at 1% and a little more than investing in a 30 year treasury bond.  So it could be good.  It really depends on how much risk is involved.

Determining Risk

If a company is stable and is expected to have similar earnings, good times or bad, into the foreseeable future, we would expect to have a yearly dividend comparable to a short-term U.S. Treasury Bond, because there is no risk involved.  Generally, though, this is impossible to say about a company because so many things could influence the performance of the company, even to the point where the company would need to reduce it’s dividend.  And the more likely it is to be impacted by adverse circumstances, the greater the risk.

Usually the greater the risk of the investment, the more of a risk premium we would want to be paid.  So a very risky company might have a 15% dividend or higher.  It is really up to the judgement of the shareholder (or analyst) what the risk is, and hence what the risk premium should be.

Valuing Companies With No Dividends

Companies with no dividend at all would represent a very high risk typically because the share would seem to be valueless.  People do pay good money for shares of stock with no dividends, though, so how do you figure a value?  You might use earnings per share to determine value, with a very high risk premium.  If the company is reasonably stable and growing rapidly, you might accept less of a risk premium.  It’s really up to your own judgement.

What to do with your value

You now have a value per share.  How did you get it?  You know that dividend / value = rate, and you’ve determined the rate you’d be willing to accept based on risk.  You should also know the dollars dividend per share.  So we can switch around the formula and get value = dividend / rate.  So lets say the rate is 10% and the dividend is $1 per year.  The value is $1/.10 or $10 per share.  If the current share price is $8, it might be a buy.

Market Pricing is Perfect Pricing

If you bought your share of stock for $8, could you turn around and sell it for $10?  Nope.  The market is willing to pay $8 so you can sell it for $8.  And why is it $8 when you think it should be $10?  Because the market, for some reason, thinks the risk is greater than you do.  Perhaps there is information you haven’t taken into consideration.  Maybe there’s turmoil in the world.  Maybe management at the company has just changed.  It could be anything, or it could be nothing.

If market pricing is perfect, as the theory goes, then why could the reason be nothing?  You have a lot of great people who think about the value of stock, then buy and sell based on their value.  Others will simply buy what they like or sell if the market’s going down, or do many other irrational things.  So the perfect market pricing theory is a little true and a little false.

If you want to believe that market pricing is perfect, that’s great.  Then the price the market is willing to pay today is the value of the share of stock.  Then you would buy a stock just to be invested, catch the share price growth or dividend growth if there is any.  And truthfully, it really could go either way.

A basket full of stocks

As the theory goes, the more different shares of stock you have, the more you have diversified the risk.  In other words, it’s more risky to own $10,000 worth of one stock than owning $10,000 evenly split between 50 stocks.  The overall market will go up and down, but mostly up over time, but an individual stock could soar or go out of business.  You really don’t know for sure.  But buying many stocks virtually eliminates the risk of a big loss because of a bad company.

Summary

Valuing stocks is a tough job for a novice investor.  It is sometimes best to buy good diversified mutual funds rather than invest in individual stocks.  But if you can have a diversified portfolio of stocks, your risks are reduced and you will pay less in fees than owning a mutual fund.  However, you really need to understand what you are doing before you jump in with both feet.  Invest with a small sum of money for a while.

This is the longest article I’ve ever written on any subject and I hope it was informative.  I tried to keep it as simple as possible.  If I got something wrong, I do apologize, I am not a stock analyst by trade.  I am just trying to provide basic information.

How do you choose what shares of stock to buy?