I have to admit I get things wrong from time to time.
A year ago, when the pandemic’s first inklings were surfacing, I commented on a post someone made on Facebook.
They were discussing the gravity of the situation, and I went to the numbers. I shared how quickly the stock market shook off previous epidemics.
In some respects, I was right.
You wouldn’t know the economic damage that has been done by looking at the S&P 500.
Yet unemployment is at a decade high, and the pandemic has done massive damage through the shutdown.
Multiple stimulus acts will soften the blow, but we have literally created trillions of dollars, loading up our national debt.
I’m not looking to get political.
I”m exposing you to economic cycles and setting the stage to talk about Ray Dalio’s economic model I shared at the start of the series. The idea there are cycles within cycles we need to understand.
Ray’s hedge fund success was built on a strategy that leveraged his understanding of debt and deleveraging cycles and how they drive the economy’s expansion and contraction.
He believes these cycles happen within even bigger cycles.
Why should you care?
Understanding the broader economy and how to navigate it will give you a competitive advantage.
There was a time in history when the Dutch were the economic masters of the universe.
The Dutch East India Company still holds the title of the most valuable company ever. You can see from the graphic below that it was a larger part of the world economy than Amazon of Google are today- combined.
A Dutch Guilder was the exchange currency of the world. A time when the US dollar didn’t exist because it wasn’t a country.
While the Dutch were in ascendance, there were smaller up and down cycles that affected the economy, like the tulip bulb bubble where rare tulip bulbs were going for prices ten times the average annual laborer’s wages.
The Dutch East India Company survived that bubble and continued to grow until it didn’t.
Today the world has more people in it that are better educated and healthier, all without the Dutch East India Company.
The British Empire then rose to power during the fall of Dutch economic power. The United Kingdom became the economic powerhouse and currency of choice until it wasn’t anymore.
It only takes a few generations for a megacycle to make a change. The last one was defined at Bretton Woods, where the US dollar became the default currency.
Since then, our economy has shifted from industrialized to digital, and who knows what’s next. These meta changes influence the entire economy. Within them, we have economic expansions and contractions that affect the outcomes of industries.
The issue is that some of these trends are so big we can’t see them, or worse, so dependent on them we can’t imagine a world without the trend continuing.
Will another of these megatrends occur in our lifetime?
Then there are the business cycles of a single company—your business.
Just in my life, I’ve been involved in four businesses: some successful, some not. But each had cycles of expansion and contraction. Sometimes those cycles were influenced by more significant economic trends, and other times they contradicted the larger economy.
How much do you think about these cycles?
Below is my take on the cycles a publisher faces from smallest to largest. As you go through the list, think about how these cycles are pushing your business forward or holding it back.
Launch Trough: This is the cash needed to get a book produced and launched. It has a depth and a duration that, if never filled, means your business won’t be profitable. A publishing business is built on a series of these launches.
Growth Curve: This curve is made up of the peaks and plateaus of your growing audience. This is driven by your existing audience’s consumption (peak) and your sustained attraction and read-through between launches (plateaus).
Genre Popularity: Your writing fits in a genre. This genre will ebb and flow based on general population interest. K-Lytics provides estimates of how genres and sub-genres expand and contract.
Media Growth or Contraction: New media will come to be and existing media will grow or contract. There are also changes in entry barriers, meaning media previously too expensive or blocked by distributers will become more accessible. This changes audience access. The best example of this is how audiobooks have exposed non-readers to indie writers.
General Economy: The overall economy (state, national and global) will influence discretionary spending and expansion and contraction of the markets.
Meta Trends: The more significant trends, be it Dalio’s ideas about deleveraging sovereign debt or my meta trends that will influence content. These are massive shifts that, in hindsight, seem obvious but before and during are not.
If you’ve ever been on an airplane in a storm, you had the first-hand experience of how the larger environmental forces can influence you. You may have had one of those stomach-churning drops that happen when the wind shifts and tosses the airplane like a toy.
Sure, you see clouds and rain, but you don’t see these massive movements of air that buffet the plane and can change your altitude suddenly.
That’s the economy and markets at large, a swirling semi-organized interaction with sometimes conflicting patterns.
Look at the Euro’s value against the US dollar every month over a decade, and it is down significantly in value, but look at it daily over the last year, and its value is up.
Things go up, then they go down, and your perception of them is all predicated on your viewpoint.
My analogy of you sailing the seas of publishing is appropriate. While your ship crosses these waters, considerable forces are at play, like the tide and weather patterns. The sea you sail on is connected to other industry oceans.
Earlier in the series, I suggested that you’ll have the privilege of getting your publishing business through four to six recessions. Yes, privilege!
These are unavoidable. Some economists would argue that all we do to lessen a downturn’s impact only makes future contractions worse.
The number and the severity of downturns are uncertain but inevitable as Thanksgiving is to a turkey. Everything is perfect until it isn’t.
If we build that antifragile business, it becomes more resilient in downturns, using its advantage to leverage strength over those that aren’t joining you to create a better publishing business.
How do we do this?
Of course, you will not eliminate stormy weather, but you can become a better navigator.
Back in the 1600s, when the Dutch East India Company was in its heyday, ships had no way to determine longitude.
They navigated longitude by dead reckoning. Dead reckoning is where you estimate your position by determining your speed and add it to past days’ speed to calculate your location.
While latitude was easy to determine, using the sun’s position and horizon with a sextant longitude was not. Using dead reckoning was problematic because your errors in calculation accumulate. To make matters worse, if you hit a storm, you can’t tell how far you’ve been blown off course.
In 1714, the British Parliament passed the Longitude Act.
Think of it as the X-prize of the eighteenth century. They offered a prize for someone who could design a clock useable on a ship that would not lose over ten seconds a day.
Reliable mechanical clocks existed since Galileo, but they were too delicate to be brought on a ship and remain accurate enough to calculate longitude.
With a chronograph of the accuracy noted in the Longitude Act, you could calculate longitude and correct your course.
To know exactly where you are, you need to know latitude and longitude.
In this analogy, a profit-and-loss statement is your latitude measurement. It tells you if you’re making a profit.
You also need to know when the profit turns into cold, hard cash that you can use as you like. That’s your cash flow, and I liken it to longitude—a more complicated and critical measurement.
A profit and loss gives you the direction – making money or losing money.
Cash-flow tells when to expect cash or when you’ll run out of cash.
You can show a profit with sales on Amazon but run out of cash waiting for them to deposit funds. That’s the difference between being profitable and having money.
You can be a six-figure author but have no cash because you spend it all on expenses with nothing going to you as the investor.
When a storm hits, knowing how much cash you have and what you need to get to the other side of the storm makes your business more durable than others.
Setting the right growth rate for your cash flow and sanity will build a stronger business. It may be “smaller” in revenue, but it produces more cash.
A business that has high revenues and low positive cash flow can crash quickly.
A company with strong cash flow will build cumulative advantage exponentially.
Now you may say this is too hard, too confusing, not my thing…
These are excuses.
Would you get on a ship where the captain refuses to use a sextant?
He may cross the sea safely.
He may even end up close to your expected destination.
That’s luck.
You become “luckier” by using these tools to improve your probability of hitting your port of call.
Remember, the issue with the unforeseen is that it’s unpredictable.
Those black swan events are hard to prepare for, but winter storms on the Atlantic or hurricanes in the Gulf of Mexico are not unforeseen. They are inevitable.
The more you plan to be out on these waters, the higher your probability is to hit a storm.
Do you know what to do in a storm?
Do you have the tools to get your ship back on course after it is tossed around by the winds and waves?
If Ray Dalio is correct, there are waves within waves within waves. We can’t perceive if we are on a tsunami ready to crash when we ride a minor rising wave on its back. Yet, we are influenced by every wave.
This email isn’t about wave prediction but preparedness.
Adopting tools, you may not be comfortable with and learning how to use them even at a rudimentary level will give you an advantage.
The reality is a lot of ships will sink crossing these publishing waters.
Far more than we will ever remember. Sure, we will all reflect on a cautionary tale here or there of an author that gained some notoriety and then was wiped out, but who wants to be that story?
The irony is that most authors will spend dollars and hours learning how to advertise, furiously scribbling notes to record someone’s strategy. Still, they won’t take the time to learn basic business navigation skills of cash flow.
A skill that works for all businesses and won’t go obsolete. How much time did you spend learning some advertising strategy just a few years ago that is now worthless?
As aggravating as that may be to me that most authors neglect this tool, you should rejoice. If you learn these skills even at a rudimentary level and apply them to your publishing business, you’ll end up sailing past your peers.
Let others say they are too creative to understand how cash flow works while managing yours better each year.
In a market economy, where cumulative advantage prevails (publishing), capital accumulation is a force multiplier.
I know my work will take root when authors discuss how their business delivers double-digit post-tax cash flows rather than focusing on top-line revenue. Those will be the authors that dominate the future of the business.
In the Perfectionists: How Precision Engineers Created the Modern World, Simon Winchester lays out how precision like the Maritime clock and machine tools that could make replica block and tackle changed maritime trade and is likely why the British shifted to preeminence.
Maybe those who subscribe to this newsletter will be the precision engineers of publishing—producing an elite group of creatives that use essential business tools to build durable businesses. You’ll be the ones that can compete in a more mature market.
With these skills, you navigate around storms. When you get blown off course—we all do from time to time—you can correct quickly and get to your port of call.
Next week I’ll elaborate on meta trends that I see driving the golden age of content creation. This is a rising tide that will lift all boats—all boats that stay on course and don’t get lost at sea.
Best,
Joe