Demographics and the stock market.

In 1987 I had the incredible luck of hearing from my manager that I passed the securities examination. He told me the results on Monday the 19^th day of October. For you younger readers (I can't believe I typed that) in one day, the Dow Jones went down 22.6%! This was a very big day.

At the time it was blamed on too much portfolio insurance. I know, how can too much insurance make things fall apart? Wall Street always has a nice answer to each major catastrophe. I think they love putting a name and reason on each big crash to give us that feeling that it was all expected, no worries. This round it is too many subprime loans, underwritten and bought by the wrong people. I can’t wait to hear the next excuse in 2010, but more on that in a moment.

One thing I learned at Lehman, all crashes are caused by the big boys running for the exit at the same time and trying to slam the slow guys fingers in the door. This round, Goldman Sachs and JP Morgan Chase made it to the door first, Bear Stearns was a little too old and fat. The good news, Wall Street is not going away, the bad news, we are.

Out of all the clutter I have read by over educated economists that are long on theory and short on real experience, Harry Dent’s work really stands out. He is a Harvard chap, we don’t hold that against him, but he has cut his teeth as a fund manager and has a elegantly simple answer that is eerily correct over the past 50 years.

The stock market is controlled by demographics.

I know not earth shattering breaking news for some, overly simple you might say. I love simple. Here is the theory. We go through economic cycles as individuals from the moment we pop out of the womb to the time they stick us in a pine box. Studies have shown that between the age of 46 and 50 we peak in our spending patterns. His theory was, if I project ahead 48 years and overlay the stock market on the birth cycle, it should correspond.

More consumption= more production= higher stock prices.

Check out the chart on the top (Click the chart to see a large version). Do you see that giant red top like a bloody roller coaster? That is 2010. That is when the herd of baby boomers will have passed their prime economic spending and each year after that we take a long slow painful decline for 12 years until Gen-X enters their prime spending. Twelve years!? It will make the crash of 1987 look like a speed bump.

This not only has corresponded with each blip in births for the last 50 years it makes total sense. Our economy is a scary 80% consumer spending now and 20% savings and manufacturing. If the spending slows down, prices will go down. As we start out we don’t spend much until we get to high school. In college the cash starts getting consumed even as we live like a monk. Next we get our first jobs and need fancier clothes, eat out more, need a car. Next I am getting married; need a house, bigger car, more spending…when we get to about 48, things turn over. We pull our horns in and realize we will not live forever and we take less risk, spend less and prepare for the day we need to live off of equity, not add to it. (See chart).

If Harry is right, by 2010 you better have a solid 10 year plan.

So where do we go for opportunity in all of this. The answer might surprise you. Friday I will dive into how we can capitalize on getting into the right demographic markets internationally and what are the hot franchise opportunities domestically after 2010. Next week, I will be interviewing some CEO’s that are running businesses that will thrive while most sectors will be in triage for the next decade.

Buckle up, it is going to be a bumpy ride!

Buy a Franchise with your IRA without payments or penalties.

I learned something last year I never knew before about franchising. I know it came as a shock to my wife as well. I actually do not know everything! I did tell her about the study I read regarding that housework has a devastating effect on creativity. That anything repetitive will create mental ruts that are hard to drive a creative dune buggy out of. I impressed upon her mind that my creativity’s happiness is essential to her financial security, yea it did not work, but this will.

If you are hungry to take the plunge and buy a franchise or invest in someone else’s big idea, you can do it without taking out a loan or paying any penalties.

It is perfectly legal to use your IRA account to fund it. Yes the government rightly rationalizes, hey if the stock boys can blow a hole through your IRA the size of a dump truck full of money, why not let the actual owner of the cash give it a try on their own?

I had a fantastic interview with Rob Purnell, the Director of Shepherd Capital Partners, to enlighten us on the rules of self funding. This is actually an old law but because the brokers and investment bankers do not get their equity and bond lovin, you never hear about it! I have seen this happen again and again. If the establishment does not have a financial reason to tell you about these great tools, they will bury them in the backyard.

Rob is in the bay area, but he can consult anyone regardless of where they live about the rules. Go to shepherdcapitalpartners.com, and listen to the audio now by clicking the player below. The other option, you will find a podcast you can grab-n-go on the right side bar listed as "Franchise Financing" to listen at the gym.

Why most advertising and investment ideas are wrong

Most of the senior marketing executives cut their teeth in broadcast media systems. It was the golden age of media, when you had three stations and the entire country tuning in together as a family. The “big brand” era was born with “plop plop fizz fizz” advertising, and the only thing you needed was a catchy phrase and repetition. Advertising rates were so low on the big three a fortune could be made with this very simple formula.

Times have changed but the mentality has not. For the most part we are still applying broadcast methods to a new narrowcast audience. I can look no further then my kitchen table. My 12 and 10 year old boys were cleaning the garage with me last Saturday and they saw an old yellow book in the corner that I told them to toss out. I explained it was the yellow pages and what you did with it. The look on their face made me feel like I just pulled up in a model T! It is uncomfortable to explain when I was their age we did not have cell phones, the internet, a PC and I can still remember our first TV was black and white! I need to stop, the keyboard is aging me with every click. Anyway you would have thought we found an old world war two field manual. They actually laughed! What is more shocking is the mass market tricks most advertisers have been taught from the veterans and media departments at universities don’t apply today. Wake up call, my kids say “Old People” watch the big three. With the exception of Heroes until they screwed it up in the 2^nd season. They are tough critics. They like the Disney channel and Wii. The radio is also old school. “Why would I want to listen to what everyone else listens to?” They like XM and their iPods.

Chris Anderson illustrated the difference in the book The Long Tail when he compared the budget of the Abrams Report. They get 200,000 eyeballs a day to sell ads who watch the show. It takes dozens of crew members and a big studio budget to pull it off, and then broadcast away. Rocket boom is a daily show, Jon Stewart like comedy news channel over the web. They also get 200,000 viewers, the difference; they have two people running the $2,000 cameras, lights and shoot the three and a half minute news in front of a crappy cardboard map. Yikes! Formula (Broadcasters = Revenue Junky) (Narrowcasters = Margin Junky) size matters in a perverse paradoxical, Alice in Wonderland business world we call 2007. Small has now become more powerful then big! It is the reason why big venture capital firms need to invest in hundreds of lame companies in hopes of one big winner is the same reason that big media must invest in hundreds of lame programs in hopes of a few winners. When you have a big nut, you need to make big investments on a mass scale and hope the law of averages will work in your favor. Small investment bankers can “Afford” to make a few small investments in great small companies because they need to be right, not lucky. Can small actually be more powerful then big? Can being big cloud our judgment in business because we have too much to lose if we “Change our ways”.

I have watched this first hand where perfectly capable executives that came from Fortune 100 backgrounds, became CEO’s of small promising startups and quickly ran them right into the sandbar. Entrepreneurs need to be keenly aware they need to choose their Advertising, Investment and Executive teams that understand narrowcasting realities if they want their Franchise to flourish.

If you do not believe we have entered into a new unchartered exciting world of opportunity where David gets to clean Goliath’s clock on a continual basis. Please ask your teenager what they think of the yellow pages.