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Wednesday, February 3rd, 2010

What You Ought To Know About Buffett & Munger’s Four Filters Invention

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You guys know I love Charlie Munger and Warren Buffett… I consider them American hereos.

I read an interesting book called The Four Filters Invention of Warren Buffett and Charlie Munger (by Bud Labitan) the other day — if you like business, investing or Buffett or Munger, you should buy this book.

I thought I’d briefly summarize their “Four Filters” below — I paraphrase Bud Labitan’s book at times and add in a dose of quotes I’ve collected (see my past postings on Charlie Munger Quotes or Warren Buffett Quotes) as well as some quotes and insights from other folks.

The Four Filters Invention

1) Understandable First-Class Businesses

  • Use The “Scuttlebutt Approach” — Go out and talk to a company’s customers, suppliers and competitors to find out how the industry really works (Philip Fisher wrote about this in Common Stocks and Uncommon Profits (thanks for correcting me, Santosh!)
  • Treat Any Investment As If You Owned Only That The Rest of Your Life
  • “To understand a business, figure out what results it is achieving, why it is getting those results, and what could happen to change what is causing those results.” — Charlie Munger
  • Keep it Simple — Charlie Munger is fond of saying: “We just throw some decisions into the ‘too hard’ file and go onto the others.”
  • Read as much as you can about businesses — Buffett and Munger recommend reading annual reports and The New York Times Century of Business by Floyd Norris and Christine Bockelmann)
  • “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.” — Charlie Munger

Circle of Competence

Buffet advises investors to focus on their “circle of competence” (that which they know the most about).

“Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times.” — Warren Buffett

2) Enduring Competitive Advantages (Favorable long-term economics) (aka “A Protective Moat Around Their Economic Castles”)

Michael Porter suggests that there are two major types of competitive advantages:

1. A Cost Advantage

2. A Differentiation Advantage

“Something Special in People’s Minds”

Buffett and Munger have simplified this to “something special in people’s minds.”

“American Express has financial integrity; there’s worldwide acceptance of its name. It holds two-thirds of the market while charging more for its product…you have something special in people’s minds.” — Buffett at Berkshire’s 2000 Annual Meeting

“A Moat Around Their Economic Castles.”

“We look for moats around the castle. We think in terms of moats and the impossibility of crossing it — we want it widened every year. If it’s too narrow, we leave it alone.” Buffett at Berkshire’s 2000 Annual Meeting

The strong consumer brands of CocaCola and Gilette (later bought by Proctor and Gamble) were examples that Buffett gave in his 1993 Letter to Shareholders: “The might of their brand names, the attributes of their products and the strength of their distribution systems give them an enormous competitive advantage…”

Here’s another classic Buffett quote on the topic: “I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years time. Take Wrigley’s chewing gum. I don’t the think the Internet is going to change how people chew gum.”

3) First-Class Management

  • Only Work With Good People — “You can’t make a good deal with a bad person” — The Tao of Warren Buffett
  • They Should Be Able & Trustworthy — “Ability will get you to the top, but takes character to keep you there.” — Abraham Lincoln
  • Good Question To Answer: Does Management Have “Skin in the Game — A CEO should have at least one year’s salary worth of his own money in stock in the company they are running, according to Pick Stocks Like Warren Buffett by J.K.Lasser.
  • Management Should Have Their Own “Checklist” — “No wise pilot, no matter how great his talent and experience, fails to use his checklist.” — Munger

4) A Bargain Price

“We look for a horse with a one in two chance of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing. Charlie Munger from Poor Charlie’s Almanack.

Margin of Safety — Benjamin Graham called this “margin of safety” — that is, the difference between the intrinsic value of a business versus what the asking price is.

How do you calculate intrinsic value?

Well, I recommend digging into Ben Graham’s Intelligent Investor book for the real details…but if you want a neat little formula than check out this Warren Buffett Intrinsic Value Calculator.

Patience For A Sensible Price Tag — Munger & Buffett refer to waiting for the “fat pitch.” Be very patient, but be very aggressive when it’s time.

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Tuesday, June 23rd, 2009

How To Shape A Market By John Hagel

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A very insightful man named John Hagel III spoke to a couple of hundred developers at eBay’s DevCon 09 gathering at eBay’s headquarters in San Jose last week.

I attended (even though I’m not a developer) and luckily Hagel’s talk was not technical!

Some of you may know John Hagel from his book Net Gain, which discusses how online networks have shifted the power in goods and services. He also runs The Center for the Edge in Silicon Valley.

shapingstrategy

Mr. Hagel’s topic last week was “Shaping Markets”

By Shapers, Mr. Hagel is referring to companies that transform a market sector. His Shaping examples included the following:

  • Containerized Shipping (1950′s) — Sea-Land founder Malcolm McLean reshaped global shipping by developing a design for four-corner fittings and twist-lock mechanismis on shipping containers…and made the design available industry-wide.
  • The Visa Credit Card (1970′s) — VIsa Founder Dee Hawk reshaped the credit card industry around the notion of a shared utility. This allowed banks to outsource their credit-card processing to Visa so that the banks could focus on customer acquisition
  • Microsoft and Intel’s PC Marketplace (early 1980′s) — Microsoft and Intel led the charge of a set of protocols of a chip and operating system that formed the personal computer ecosystem.
  • Li & Fung Apparel Supply Chain (1980′s — Victor and William Fung reengineerd the apparel industry by providing a simple phone/fax system for its 10,000 partners. Roughly 40% of all apparel is sourced through one of Li & Fung’s supply chain

The Three Elements to Being a Shaper

Hagel says that a Shaper must have three things:

1) A Shaping View

An example of a shaping view is Microsoft Co-founder Bill Gates’ message in the early 1980s that is summarized: “Computing power is inexorably moving from mainframes to desktop. If you want to be a leader in the computing industry, you have to be a leader in the desktop.”

At the time, the mainframe (IBM) and minicomputer (DEC) guys were discounting the personal computer.

Gates’ Shaping View galvanized small companies to invest in his vision of a “Computer on every desktop.”

A more recent example of a shaping view is Salesforce.com’s Founder Marc Benioff’s Shaping View that companies could reduce their technology expense if they used software through network services (as opposed to software packages installed within each company).

In short, Gates and Benioff are saying: “The future is over here — this is where you ought to invest…and there are real rewards associated with it.”

2) A Shaping Platform

Mr. Hagel explains that to be a “Shaper” you also need a platform that offer one of two types of leverage:

A) Development Leverage — A technology such as the force.com technology from Salesforce.com or Facebook’s Application Development Tools that reduces the investment required to build and deliver products or services.

B) Interaction Leverage –  A set of protocols and practices to facilitate interaction. Google AdSense is a good example of this as it allows a connection between advertisers, content providers and consumers.

3) Shaping Acts & Assets

Mr. Hagel says that a Shaper must demonstrate  conviction, capability as well as assurance to other participants in the industry that it will not compete with them.

His best example here was Novell, the computer networking company that sold off its hardware business to concentrate on its local area networking operating system.  That was a bold move that signaled to others in the industry that Novell was serious about focusing on a network operating system — their dominance of that industry soon followed.

Another example: Malcolm McLean released his patents for the four-corner fittings and twist-lock mechanisms royalty-free to the International Organization for Standardization

Incentives are Important

There is also the question of how do you motivate people through positive rewards as opposed to negative rewards.

Clay Shirken, for example, believes in negative rewards — your company will go out of business if you don’t act.

Mr. Hagel seems to lean more towards positive incentives — He recommends shifting perceptions of risk and reward.

Crisis is an Opportunity

During crisis, we magnify risk and minimize reward. That’s an opportunity for a shaper is to come in and flip that.

You should magnify perception of reward and discount the perception of risk. If you do that you can motivate people to make investments around your strategy, you can reshape entire markets or industries.

Shapers Can Start off Small (even within other platforms)

You don’t need to be a large company to be a shaper. Visa at one point was a no-name startup. Malcolm McLean was a trucker from Arkansas.

Startups can be very successful shapers if they mobilize the three elements above — Shaping View, Shaping Platform and Shaping Acts and Assets –  together.

Facebook is a current shaper. There are also opportunities to be shapers within an ecosystem — a company called Social Media Networks is creating a platform for Facebook to help faciliate aedvertising revnenue.  It’s a  shaping play within the broader Facebook ecosystem.

Making Money Even If You’re Not a Shaper

Here are some key lessons for you to make money in these shaping strategies even if you’re not the Shaper.

1) Be Acute in measuring a Shaper’s capabilities and potential for success. You ought to be comfortable that that Shaper is going to pull it off.

2) You’ve got to be clear about what niche you’re operating in…and what’s truly distinctive that insulates you from the rest of the participants.

3) Leverage Skills — You have to think about who else is out there in the ecosystem to take full advantage of the ecosystem. Who are those people and how to I build those relationships so that we all gain value from the shaping strategy.

4) Ultimately, the power of these shaping strategies is that you are able to learn faster. How do you learn from the experience of everyone else (not just your own experience)…and how do you adapt for your own sake.

Final Thoughts

The core message: not everyone is going to be a shaper. But more and more markets will be shaped over time.

The key question: do you want to be a shaper…or do you want to be shaped? You can make a lot of money either way. But you have to understand the rules of the game in order to succeed.

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Wednesday, May 27th, 2009

7 Easy Tips On How To Be A Go-Giver (Not a Go-Getter)

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I first heard about the concept of being a “go-giver” from Bob Burg in a book he wrote called Winning Without Intimidation; he later made the phrase more popular by writing Go-Giver: A Little Story About a Powerful Business Idea.

I used the Go-Giver phrase, which is corny but good, in a speech I made to entrepreneurs a few years back.

source: Túrelio, Wikimedia Commons

source: Túrelio, Wikimedia Commons

From that speech, and others, here are seven tips to being a better networker or go-giver:

1) Giving is Attractive — “No matter what your profession, if you can give increase of life to others and make them sensible [i.e., “aware”] of this gift, they will be attracted to you, and you will get rich.” Wallace D. Wattles from The Science of Getting Rich

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Tuesday, May 26th, 2009

MySpace & Other Examples of E-CPMs

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I recently finished reading Stealing MySpace, an interesting “inside-baseball” look at the building of MySpace and eventual sale to Rupert Murdoch’s News Corp. for $750MM.

While the MySpace story had a happy ending for most, it also reminded me of the surprisingly low e-CPM (effective CPM or cost per thousand) of many Web sites that either sell through third-parties or have ad inventory that’s difficult for advertisers to understand/value.

e-cpm-stealing-myspace

MySpace earned an e-CPM of about $.20 in its early days (November 2004).

To put an eCPM of $.20 into perspective, that means that MySpace had to generate 500,000 page views on its Web site to earn just $100 in advertising revenue…or 5 million page views to earn $1,000… or 50 million to earn $10,000.

Now, MySpace charged much higher CPMs (up to $2 or so) on many of its pages, but the average it received for all of its pages was closer to $.20, according to the book.

For those of you thinking of selling advertising on your Web sites, I thought I’d add a few other less-known e-CPMs or CPMs for you:

  • Mojam (a music Web site I founded and sold) — Mojam had an e-CPM of $.91 while I was running it.
  • PlentyOfFish (free matchmaking site) — This innovative online matchmaking site had an e-CPM of $.75, in my estimation, during 2006 when various articles about their results (fueled when POF Founder Marcus Frind showed pictures of his giant Google AdSense checks (the calculation I’m using is $375,000 in monthly revenue divided by about 500MM monthly impressions).
  • StevePavlina.com — This useful personal development site had a Google AdSense CPM of around $2.80 in December 2005 when he shared some stats on his site (note: I used the term “Google AdSense CPM” for this one because Steve Pavlina generates income from other sponsorship/affiliate-related sources that he didn’t disclose) (interestingly, Steve Pavlina appears to have taken down all of his AdSense ads since then).
  • A Colleague of Mine’s Tips Web Site — Someone I know has a site currently (as of this month) generating 250,000 page views per month and about $200 per month in ad revenue; so his e-CPM is $.89.

Now, interestingly, while all these e-CPMs and CPMs seem low, all of the companies mentioned were profitable. That’s because their cost of delivering 1,000 page views was very, very cheap.

Hosting CPM

MySpace, for example, spent only $.07 on what I call “Hosting CPM” (i.e. delivering each of its 1,000 page views) in its early days (November 2004); and since they had minimal other expenses at the time they were able to break even at that point.

My colleague’s Tips Web site (in the fourth bullet above) spends only 3.5 cents in Hosting CPM and minimal other costs, so he makes a profit.

To see the other costs in running a Web site check out my How Much to Pay for a Customer article.

Your e-CPM Scales as You Scale

The economies of scale work in your favor as you are able to command higher CPMs as your volume of page views (and brand value) increase.

For example, MySpace is now reportedly generating $75MM per month through about 40 billion page views for an e-CPM of about $1.88, according to this Silicon Alley Insider article.

So, they almost 10Xed their e-CPM from their early days!

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Sunday, May 10th, 2009

A Simple Formula For How Much to Pay for a Customer

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I’m going to give you a formula to determine how much you should invest to acquire your typical customer.

I call it “Desired Customer Acquisition Cost.” I also saw it referred to as “Allowable Acquisition Cost” in Ready, Fire, Aim: Zero to $100 Million in No Time Flat, an excellent book I recommend by Michael Masterson (I borrowed a couple of his ideas for this article!).

Note: I’m going to write a separate article on customer acquisition strategies, customer acquisition programs, customer acquisition networks and the overall customer acquisition process — please come back for those!

How Much is Your Customer Worth?

How Much is Your Customer Worth?

Ok, on to your Desired Customer Acquisition Cost.

For starters, you’re going to need to do a few calulations of your own…don’t worry about having the perfect answers — just give it your best shot!

Calculate Your Customer Lifetime Value (aka Gross Sales Per Customer)

You need to estimate the lifetime value of your customer.

Let’s first define customer lifetime value. It is how much a customer will spend with you for their lifetime (i.e. the total number of products they buy from you over time multiplied by the price of each product).

If you’ve been in business already, you might know your Customer Lifetime Value. In fact you could simply divide the total amount of sales you’ve had since you began by the total number of customers you’ve had).

If you’re in a new business, I suggest you research competitors or other similar companies to yours to get a sense of their lifetime value.

For now, if you don’t know what your Lifetime Value is then you could use the range I use: where Lifetime Value is typically about 2X to 6X the price of the first product your customer typically buys from you.

For example, if you customer is likely to pay around $50 for the first product they buy from you, you could expect the lifetime value of your customer to be anywhere from $100 to $300.

Where’s the 2X to 6X range come from? That’s just my experience with businesses I’ve seen. Remember, your business and others can be very different.

Sidenote: If you are selling a subscription-based product (e.g. Netflix, DirecTV, Sports Illustrated) as your first/primary product, then your lifetime value is going to be very different. The lifetime value of a cable/satellite customer may be 10 to 40X the first month’s price since they are likely to stay with their service for a few years (i.e. 10 to 40 months).

We’re going to use a Lifetime Value of 3X for this exercise.

Obama’s Lifetime Value

Let’s pick a fictional company to make this easier…we’ll call our pretend company Obama Enterprises (they sell a set of information products on how to become the next President!).

Obama’s flagship product is a $50 DVD that he’ll ship you on the basics of what it takes to be Mr. President; he has more expensive products that he sells you on the back-end.

So, let’s use $150 (3X the price of his first product) as our Lifetime Value.

Calculate Your Refunds, Cancels, Bad Debt, etc

If your business is like most, your customers will cancel or request refunds, or simply not pay you.

This varies by industry and by business.

For Obama Enterprises, we’re going to assume that 10% of the sales will be refunded, canceled or otherwise just not collected as cash we keep.

So, Obama’s Refunds & Cancels is $15 per customer (10% of $150).

Calculate Your Cost of Goods Sold

First off, most people who know what Cost of Goods Sold is call it “COGS” (sounds cooler, right?).

Here’s the COGS definition:

  • The materials cost used in creating the goods plus
  • The direct labor costs used to produce the goods

Note: COGS excludes sales, marketing and distribution costs.

COGS varies by industry but are typically in the range of 20% to 50% of the price of your good.

For example, the retail industry is known to mark items up by 100% so in essence their COGS on a $20 shirt is 50% or $10.

In the Software or Internet industry, the COGS is very low (typically just 20% of the sale)…for example, if Microsoft is selling you a software product for $200, it likely only costs them $40 (20% of that) to create/produce.

Since the COGS for Obama’s video product are pretty inexpensive (Discs, box, etc.), we’re going to use 20% of $150 (or $10) as his COGS estimate.

Calculate Your Overhead Costs

Let’s define overhead cost: It’s simply all the costs that are NOT associated with any specific business activity we mention in this article.

Examples of Overhead costs include: Payroll (All Payroll except that included in COGS), Insurance, Rent, Utilities, Legal, Accounting, Travel and Entertainment.

Again, you’re going to have to research your business’s math (or that of your industry if you’re new), but a good rule of thumb is that Overhead will eat up about 33% of your Sales or Lifetime Value (most of this is due to your labor costs).

So, Obama’s Overhead costs are about $50 (33% of $150).

Now, the only other cost we haven’t covered so far is the Customer Acquisition (or Marketing) cost…we’re going to skip that for now as that’s what we’re trying to determine.

Calculate Your Desired Profitability %

Let’s skip to how much profit you want.

Profit is how much money you want to keep after all expenses (except taxes) are paid…you know it as the “bottom line” (Google and Microsoft tend to keep a profit of 20% to 30% while other businesses are more modest with a profit of 5% to 10%).

Obama’s people are not greedy, so we’re going to pick a profit goal of 10% for Obama Enterprises.

So, Obama’s Desired Profit is $15 per customer (10% of $150).

Ok, now for the good part. Here is how you calculate your Desired Customer Aquisition Cost:

Desirable Customer Acquisition Formula =

  • Lifetime Value minus
  • Refunds & Cancels minus
  • COGS minus
  • Overhead minus
  • Desired Profit

So the formula for Obama’s customer acquisition is:

  • $150 Lifetime Value minus
  • $15 Refunds & Cancels minus
  • $30 COGS minus
  • $50 Overhead minus
  • $15 Desired Profit

…And thus the amount Obama can spend to buy one customer, drumroll please, is…

= $40

And There You Have It (Your Desired Customer Acquisition Cost)

So, if our assumptions are ballpark-accurate, Obama can go out and spend an average of $40 to acquire each customer who buys his $50 DVD product, and still have all his expenses paid and a desired profit of 10% of all he sells.

For example, he could offer to pay you $40 for each customer your Web site sends over to his…and if you sent him 1,000 customers, he would gladly pay you $40,000 (1,000 times $40) because he would eventually receive about $150 in Lifetime Value from each of those customers and eventually receive a profit of $4,000 (the 10% Desired Profit he calculated) on his partnership with you.

Caveat here (which you probably already figured out):

Since Lifetime Value is over time, Obama has to make sure that he has the proper cash flow to afford to pay all bills while he earns the lifetime value for customers.

That’s called “Cashflow” or “Working Capital” and it has to wait for another day!

Though, if you want to improve your creditworthiness (so you can get better/larger loans or credit card limits), you should read How to Boost Your FICO Score.

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Friday, May 8th, 2009

2 “Moneyball” Tactics to Hire Undervalued People

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I was inspired by the book MoneyBall by Michael Lewis who chronicles the Oakland A’s baseball team and its strategy of focusing on undervalued players in the Major Leagues.

The Oakland A's Proved You Don't Need The Most Money To Win With Hiring

I’ve found some success in applying this to business. Specifically, I am always on the look out for undervalued people.

Here are two examples of undervalued people I look out for and find:

Falling Stars (or “Falling Angels”)

Falling Stars are workers who hit a certain apex in their career and then for some reason fell — often far — from that level.

The reasons they  are “falling” may include personal problems such as divorce, substance abuse or alleged unethical or illegal activity.

Such Falling Stars are worth a close look to be given a second chance, especially if they proved themselves for a long period of time before their fall from grace.

I recall an attorney who was having a challenging time on the job market because one of his prior employers had run into trouble with the Federal Government and this had tainted the attorney’s reputatin…but closer scrutiny showed that this individual had done nothing wrong and in fact had a track record of 25 years or proven value! He was a fallen star.

Note: Since I wrote this post, I read a good post by Dallas Mavericks owner Mark Cuban in which he used the term “fallen angels”  to describe players who were former stars on the decline in performance, but whom improved in the right new situation.

Mark gets it.

Diamonds in the Rough

A second example of undervalued people is what I refer to as “Diamonds in the Rough.”

Diamonds in the Rough are different than Fallen Stars…as the label implies — they are quite valuable individuals who are simply not appreciated for their potential.

Diamonds in the Rough usually exist because of poor managers or leaders surrounding the Rough Diamond.

A good place to look for such Diamonds in the Rough are mismanaged companies as they sometimes forget to dig deep enough to find their diamonds.

A good sign of a mismanaged company is one ego-driven management; they typically take their Diamonds for granted.

A great time to hire Diamonds is when their employer is not doing so well in business…perhaps their sales have flattened or profits are down. The Diamond will have his or her antennae up a bit higher during those times…and you can scoop in and hire them!

MoneyBall Author Michael Lewis has written a couple of other good books I recommend (especially if you like “inside baseball” type books with real-life characters being written about as if they were fictional:

Liar’s Poker: Rising Through the Wreckage on Wall Street (in inside look at Wall Street from his four years working at Salamon Brothers) and

The New New Thing: A Silicon Valley Story (About Jim Clark who founded Silicon Graphcis, Netscape and Healtheon)

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Friday, May 1st, 2009

7 Tips for Writing Like Warren Buffett

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I’m willing to bet you that half of Warren Buffet’s success is due his effective communication (most of his other half is his sustained focus (i.e. his singular focus on creating wealth over 60 years!).

If you don’t believe me, you should read his annual reports or watch video of him on CNBC and YouTube.

I wonder if one of the reasons I like Warren’s Plain English style is that we’re the same personality type (ISTJ).

Warren Buffett: A Master of Plain English

Some people, including me, refer to his communication style as “Plain English.”

Here are seven tips for using the plain english style of writing used by Warren Buffett, Mark Twain and others:

Seven Tips for Writing Like Warren Buffett (Plain English)

#1: Personal Pronouns

Focus on the first-person plural (we, us, our/ours) and second person singular (you and yours). The purpose is it’s more direct, more conversational and avoids the he/she dilemma.

For example:

(Before/Poor) — “This article will enlighten readers and contribute to people’s success versus.”
versus

(After/Better)– “I will enlighten you in this article and contribute to your success.”

#2: No Weak Verbs!

Steer clear of verbs such as “to be” and “to have.” They are weak!

Take the following sentence for example:

(Before/Poor) — “We will make a distribution of cash to every person in the company if our business is ever sold.”
versus

(After/Better) — “We will distribute cash to everyone in our company if we are sold”

Hint: nouns that usually end in “ion” can be replaced with a more powerful verb (in that case, “Will distribute” replaced “will make a distribution”).

#3: Write in the Positive

Use “unable” instead of “not able” and “exclude” instead of “not include,” etc. — This is shorter and more clear.

#4: Active Voice (Instead of Passive Voice)

Try to use active (as opposed to passive) voice and go in order of Subject, Verb and Object. For example:

(Before/Poor) — “The product is bought by the customer”

(After/Better) — “The customer buys the product.”

#5: Avoid Superfluous Words

Try to avoid words that don’t add much value such as “in order to” (use “to”) and “Despite the fact that” (use “Although”).

Why?  Readers understand sentences in the active voice more quickly and easily because it follows how we think and process information

#6: Communicating to a Group

When communicating, you should know your audience…that’s basic, but if you’re communicating to a number of people try to write with a certain person in mind.

For example, in this article I try to envision writing to Lakshmi, a department head of a medium-sized business I know.

When I’m writing about something technical, I write with my Mom in mind.

#7: Avoid Contract Language

Steer clear of “Contract-type” language with definitions — this is the opposite of Plain English.

The best book on the subject of Plain English is How to write, speak and think more effectively by Rudolf Flesch.

And then there are Warren Buffett’s famous annual reports.

Plain English, Please!

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Thursday, April 30th, 2009

How To Mazimize The Number of Valuable People You Meet In Life (The Connector Exercise)

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A number of people ask me how I obtained a large network of contacts (I have 3,000 names in my iPhone).

I took two of my "Connectors" to the Famous Gene and Georgetti's in Chicago

I took two of my "Connectors" to the Famous Gene and Georgetti's in Chicago

Strangely, I’ve never thought of myself as a schmoozer…I’m actually fairly introverted.

But I’ve been very lucky. A few things were in my favor:

  1. Same Career Track — I have followed a fairly narrow career track of technology/media/Internet for 20 years now.
  2. Social Positions — My positions have centered around other people (I was a journalist, a deal-maker, entrepreneur, etc.)
  3. Decently-Organized — I’m a detail-oriented/organized-type of person and so I’ve done an ok job at entering in people’s contact information over those years

So, the 3,000 names isn’t that impressive — it really just came from 20 years times of storing an average of 100+ contacts per year.

That’s just 1 new contact I made (and stored) every 3 days. I’m sure you could do that (unless you’re a monk at a convent in which case you’re probably in the wrong place right now!).

But there is one secret I was reminded of a few years ago that I wished I had implemented earlier on in my career!

It’s only briefly mentioned on page 37 of the soft-cover version of The Tipping Point by Malcolm Gladwell.

In a word: “Connectors.”

Here’s an exercise I’d like you to do (should take 15 minutes and be fun):

  1. Get out a blank piece of paper or word processing document.
  2. Make a list of the 40 most valuable people to you with one per line (exclude family).
  3. To the right of each person’s name, write down the name of the person who introduced you to that person (now you have two names on each of your 40 lines).
  4. Now to the right of that second name, write down the name of who introduced you to that person.
  5. If you can’t remember who introduced you to a person (or perhaps you just met at school or work then leave that line alone.
  6. Keep adding a person to the right of the previous person until you feel like you can’t go any further.

Here’s a snippet from my list:

  • Jamie>Chad>
  • Charlie>Ted>Erin
  • Jen>Ted>Erin
  • Lenny>Jen>Ted>Erin
  • Alex>Ted>Erin
  • Zack>Chris> Chad & Ted
  • Bruce>Chad>
  • Todd>Dave
  • Mike>Dave
  • Jacquie>Tracy>Erin
  • Robert>Chad
  • Mary>Dave

Now, you’ll start to notice that just a few people — in my case Chad, Ted, Erin and Dave — are responsible for connecting me to most my friends.

Gladwell calls these people “Connectors.”

I’m a Connector too, though not as good as my Connectors.

So, if you want to to expand your network, here are a few lessons:

  1. Identify the Connectors in Your Life — Find out who they are and add value to their life (so they’ll keep introducing you to others).
  2. Ask Your Connectors Who Their Connectors Are — Connectors are usually very good at having many Connectors themselves.
  3. Try Being a Connector Yourself — Offer to introduce people of value to others who need help!
  4. Leverage LinkedIn — Read why You Must Be Linked In, an article about that amazing networking tool.
  5. Read Tipping Point.

I was inspired enough by this exercise to take Chad & Ted out for a yummy steak dinner at Gene & Georgetti’s in Chicago where I presented each of them with a personalized gift. It was of minimal value compared to the value they have given me through their Connections.

Thanks, Mr. Gladwell and thank you, Connectors!

What do you know about Connectors and Networking? Please comment below.

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