Never try to run a business you don’t understand

I’ve seen one or two deals that offer systems to get rich quick.  Too many of these are on the web.  It sounds enticing.  Work two hours a week from home, and soon you’ll earn a few thousand dollars a month until you can quit your day job.

I’m all for getting rich quick.  I’m also all for getting rich slowly.  However, I don’t think anyone can build a business without first understanding it, not to mention putting in really hard work.  To run a business, you must fundamentally understand how it makes money:

“I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.” – Warren Buffett, Barbarians at the Gate.

Duty Free @ Schipol Airport
Who are your customers?  What are the products?  How do you make the products?  How much do they cost to make? Why do customers buy the products?  How are the products delivered to customers?

And you should understand your business before you invest your money and yourself into it:

“Upon leaving [the derivatives business], our feelings about the business mirrored a line in a country song: ‘I liked you better before I got to know you so well.'” – Warren Buffett, Berkshire Hathaway 2008 Chairman’s Letter

Don’t be fooled by a siren song of seeing other people making money.  Just because other people have found the waste disposal business to be profitable doesn’t necessarily mean that you have a bright future in this business.

In all honesty, I’m a Generation X’er who grew up with an Atari 800 computer – social media does not come naturally to me.  To plan this website, I’ve spent a ridiculous amount of time trying to understand how people make money on the web.  I’m still learning.

You know all those viral videos on YouTube? I’ve been wondering how they make money.  For example, take a look at FPSRussia.  How can Dmitri afford all this heavy-duty equipment?  Not from selling T-shirts.  Here’s the answer.

To effectively compete in any business, you must understand the business as well as – if not better than – your competitors.  An ignoramus can’t possibly do this.  (I’ve worked tobacco, guns, country music, waste disposal, and ignoramuses into this post.  Help!  My blog is starting to look like the History Channel.)

[Image Duty Free @ Schipol Airport by AaronC’s Photos, on Flickr]

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

One Response to “Never try to run a business you don’t understand”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: