Build Your Own "Money Machine"

What is a "money machine" and why are they so elusive?

Let me start with the disclaimer that money ranks a poor seventeenth in the list of life’s priorities, and that it is a shallow and vacuous pursuit compared to the truly important things in this world. Yet who has not fantasized about owning their own metaphorical "financial printing press", such as the world's central bankers apparently possess?

This is of course literally impossible. Yet in every society and economy in human history, there are corporations and individuals who have successfully built “tollbooths” – foolproof systems for generating and collecting revenue. Of course the tax authorities are the most accomplished at this particular game, but that is because the state has a monopoly of legitimate coercive force. Yet certain entrepreneurs have achieved a similarly lucrative outcome through luck, diligence and insight – and usually a combination of all three.

This hub outlines some of the mechanisms that entrepreneurs have used to build their own revenue tollbooths, usually over an extended period of time. Getting rich quickly is one of the most popular illusions on the internet and almost never works. Instead, those choosing the path of Croesus might possibly be better off studying the following four long-term approaches.

This hub is intended for entertainment purposes only and under no circumstances whatsoever should be construed as investment advice. Nothing, after all, is ever as easy as it looks.

Building a money machine, or toll-booth should start with lean manufacturing principles and the idea of a systemic design. A machine should by definition be automated, self-regulating and should be optimized to maximize yield. In a free market, the aim should not be to deliberately create obstructions or bottlenecks (like a toll bridge) but instead to develop a sustainable competitive advantage. It’s like building a stable and repeatable lean system from scratch.

Some argue that the internet is making us dumb. Yes the internet is a miracle of diffusion and sharing of knowledge which allows new connections and ideas to cross-fertilize and develop. Yet this great promise conceals a darker side, for a tsunami of information can often yield a superficial, shallow knowledge and a want of rigorous critical analysis. Of course a little knowledge can be a very dangerous thing indeed.

The superficiality of much modern thought is in contrast to the “profound knowledge” that Deming expounded, which is transformational intelligence developed through rigorous self-discipline and self-mastery. In an age characterized by empty charades, vacuous attention spans and widespread attention deficit disorder, people with deep mastery of thinking are likely to be more powerful than ever.

Profound knowledge can be the route to riches but is also a double edged sword. It was “rocket scientists” at investment banks, armed with superficially convincing but fatally flawed models, who built some of the esoteric credit derivatives and synthetic products that fuelled the credit bubble. Many experts in such specialist and hitherto lucrative fields as collateralized debt obligations were the first to lose their jobs in the Great Recession they arguably helped create.

This is every technology entrepreneur’s dream. If you own the plumbing in a city, you have a platform of recurring revenue every time anyone turns on the faucet. The most celebrated examples in modern culture are the titanic brand power of the Apple ecosystem, or the immense aggregating power of the Google and Facebook platforms. The phenomenon of the "tipping point", as elucidated by Malcolm Gladwell, demonstrates how beyond a certain point the adoption of cultural memes resembles an epidemic. Hence the overused descriptor “viral” to explain this kind of mass replication and universal adoption. Eventually the brand and the product become synonymous, with celebrated examples including “Hoover” (for vacuum cleaner) and “Google” for internet search. Is there an ecosystem that you could build?

Web 2.0 threw up incredible new opportunities in this area and Hubpages is just one example of a thriving, value-creating and successful system.

Ralph Charrell wrote: "Avoid the crowd. Do your own thinking independently. Be the chess player,not the chess piece". Usually those who truly have the ability to resist the flow of the culture - genuine contrarians - live somewhat isolated and disappointed lives. It is hard to persistently resist social convention and ignore the herd, for we are pack animals. Markets, in any event, can stay irrational longer than any single investor can stay solvent. Timing is a difficult art and luck maters as much as perspicacious insight.

And yet... I have recently read the superlative book “The Greatest Trade Ever” by Gregory Zuckerman. This is an erudite and engaging business book which describes how a handful of rebel investors stood against the cultural zeitgeist and acted on their belief that the U.S. housing bubble lacked foundations – that the emperor had no clothes. A tiny handful made billions by selectively shorting the junior tranches of sub-prime mortgage securitizations. Bets sometimes end in catastrophe and sometimes they make history. We tend to hear about the second group.

The greatest insights often occur at the intersection of separated disciplines. The genius of Leonardo da Vinci relied on his polymathic ability to integrate mathematical rigor and the disciplines of symmetry and perspective with excellence in the visual arts. The modern university system tends to fragment knowledge into microcosms or silos. Yet it is at the intersections between these silos that the really fruitful opportunities exist. Fortunes have been made simply by cross-pollinating ideas from one field of endeavor to another. Factory-style lean mass production technologies applied to restaurants created McDonalds and the modern fast food industry. A physics formula applied to the world of financial options led to the famous Black-Scholes model and modern options trading.

If merging disciplines and insights seems too tall an order, you can try simple geographical cloning. This is more difficult in the age of global universally accessible information but is still possible. For example,the ubiquitous Californian smoothie was brought to the United Kingdom by a company called Innocent and met with great success. Reality TV shows are simply renamed and tweaked, then sold across borders. Human nature is remarkably constant across cultures and continents, so marketing propositions that tap universal or fundamental needs are likely to be highly successful.

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