In Episode 581, Rob Walling discusses how to grow money sensibly while protecting the principle during inflationary times. He explores real estate, collectibles, crypto, stocks, bonds, and other strategies to consider as inflation and other economic changes occur.
The topics we cover
[2:00] Inflation is here
[7:20] Pricing flexibility with SaaS
[9:44] Rules when inflation goes up
[13:53] Inflation and home mortgages
[16:29] Emergency funds during inflation
[17:36] Bonds during inflationary times
[18:40] Growth stocks
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
Welcome back to Startups For the Rest of Us. I’m Rob Walling. This is a show where we talk about building ambitious startups without sacrificing our freedom, our purpose, or our relationships, and where we realize that being a founder is about making hard decisions with incomplete information. Thanks so much for coming back and joining me again this week.
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Today, I’m going to be talking about a prescient topic given that the state of the economy and the state of I guess how monetary policy is impacting things, but today is about inflation for founders. I like to kick all of these off by saying, look, this is not personal finance or investment advice. I often share what I am doing and how I’m thinking about it, but no one really knows where things are going.
I believe that inflation is here. It appears that the numbers are showing we have higher inflation than we’ve had in 40 years is the headline. I think that’s a bit dramatic. I do think that inflation is unnaturally high because of all the backups at the ports and a bunch of other factors that are in play.
One of the hard parts about inflation is that the more people think there will be inflation, the more likely it is to happen because then people essentially go out and spend money instead of keeping it because they think it will be worth less in the coming weeks or months. The more people spend, the higher prices go up, the more demand there is for things.
If you can’t get a specific good, for example, I went to order an iPad Mini for one of my kids, and the delay on the Apple site to get an iPad—this was for Christmas—is over a month. It’s almost six, seven weeks, which is highly unusual. I’m ordering a very standard color and a standard storage amount. I wound up getting it on Amazon and the wait is still, I believe, three weeks for that which is again, unusual. I’m just one signal of the supply chain.
I was actually at a TinySeed retreat last week in Arizona and I went to order a medium cup of tea basically, and she said I’m going to have to give you a large because we can’t get medium cups here or straws due to supply chain stuff. It’s kind of crazy. We’ll survive, things will be okay, but we do have to realize that this is having an impact, and it may continue to have an impact moving forward.
This has been building for a little while in terms of inflation creeping up from two to three to four to six. Obviously, inflation can come from a lot of things, monetary policy, but also money creation if the government just prints a lot of money. We’ve seen countries without a strong central bank, print themselves into hyperinflation where they just devalue the currency to the point where it’s not worth anything.
Luckily, the US has never gone down that road, but obviously, there’s been a lot of printing of money during COVID to stimulate the economy. I’m not going to get into the debate of whether it’s right or wrong, or whether who’s making a good choice and who isn’t in terms of our government because this is not about politics. It’s about the realities of if inflation continues at 4% to 6% clip, how should we be thinking about both our personal finances and also a little bit about the business.
We’re in a really unique position with SaaS and our gross margins are so high—85%, 95%. That puts us in a great position to where we’re not squeezed for, let’s say, a 10% margin. I have relatives who work in the construction industry and you go and you bid on this $10 million project to do all the electrical work or all the HVAC work. You might have $1–$1.5 million in essentially net profit built into that job, which sounds like a lot except for a $10 million construction project is really big.
It’s really hard to manage. It requires a lot of office staff, it requires a lot of electricians or HVAC workers, and there’s a huge amount of risk. For that razor-thin margin, there’s a tremendous amount of risk that you’re putting on the table.
Similar if you run a grocery store. A friend of mine’s parents run a grocery store and the margins are paper-thin. In that kind of business, as inflation happens and the cost of your goods goes up, you need to raise prices because, with a 5% or 10% margin, you don’t have room to just absorb that.
In SaaS, we tend to have room to absorb that. If AWS has to raise costs because servers get a little more expensive or power gets a little more expensive and they raise prices on you, the odds of that having a huge impact on your business are pretty small because of this tremendous margin.
The businesses that do well in inflationary times, and I’m not talking about public stock valuations, but just private businesses with a profit and loss statement. The ones that survive and do well are the ones that do have the flexibility to raise prices if needed, or they have massive margins like SaaS to where they can just absorb a 5%, 10% increase.
Imagine, let’s say inflation is 6%, and if you’re a SaaS founder, can you absorb a 6% increase in your costs and still make a complete boatload of money? You can because your net margins, your gross margins, or whatever are 90% and your net margins are 50% to 70%, depending on your scale and all that. The 6% hit just doesn’t make that much of a difference. Again, back to the example of a grocery store, if you had a 5% net margin or a 7% net margin and costs are going up by 6%, that’s a real hit for you.
In terms of being a founder, there are worse things to be running than SaaS companies, but I’d also say that if for some reason you do find that your costs are going up tremendously. Most SaaS audiences, at least the B2B SaaS that we talked about on this show, have some pricing flexibility even if you have other competitors in the space.
Some spaces like you start an email service provider and there are 300, 400, 500 competitors, you have less pricing flexibility. Although, of course, if you niche down, you can get that premium to be able to charge more. In most spaces, you need to raise your rates by 5%, 10% over the course of the next year, it’s probably going to have almost zero impact.
In fact, most of you probably should be. If you’re listening to this podcast, you probably haven’t raised your prices frequently enough or raised them as high as they should be. Isn’t that the Startups for the Rest of Us and the MicroConf mantra. At almost every MicroConf someone says, raise your prices.
I don’t feel, for the most part, SaaS is going to be hugely impacted. The other thing is this inflation is also potentially caused by lack of goods, so demand is outstripping supply because of all the boats that are backed up at these ports.
My wife went to Los Angeles a couple of weeks ago and she said the stream of boats that we were outside the ports was just incredible. You can see him lined up along the coast. We have the luxury of not being tied to the supply chain, usually. If your software, you’re reliant on maybe Amazon, SendGrid, Twilio. There are definitely companies we rely on, but we usually aren’t relying on physical goods being delivered somewhere in order for us to have a business.
Unlike our friends in ecommerce, our friends in manufacturing, it would be a nightmare. I have a friend who runs a great business manufacturing games and he said that the cost of a shipping container from China to the US went from X amount to 10x. It literally 10x’d over the course of a month or two while they were doing a Kickstarter and that’s obviously a real problem. It’s a real headache. All that to say, with SaaS, we do have the luxury of being able to roll with this and watch how things unfold.
Now on the personal side, which of course is something I’m interested in. I think if you’ve listened to this podcast for long enough, you know I’m a personal finance and investing nerd. I’ve just always been into it. I think I bought my first stock when I was 14 on my dad’s account. It’s just fascinating to me the way that companies work, the economy, and owning stocks, real estate, bonds, and all that has always kind of made my mind bend. There are some high-level rules of this kind of usuals. What are the usual things, the usual moves that you make as inflation increases?
These are some things that I’ve been thinking about over the past couple of months about making some changes to our portfolio—mine and my wife’s portfolio. As inflation goes up, usually commodities are going to also go up in price because those are part of the inflation index. I guess I should stop here and say, obviously, I’m talking about the US because it’s what I’m familiar with.
I think we realized in 2008, 2009 that our economies are so tied together that when one collapses or when one has inflation, it’s going to ripple throughout. The demand will spread. That’s the effects of globalization, for better or for worse. Even if you’re not in the US, my guess is if we have inflation, you’re going to start to see that trickle out.
Anyway, I was talking about commodities and commodities increasing in price because they’re part of the Consumer Price Index. I don’t own commodities, except for metals, the precious metals—gold, silver, platinum. I’ve never been a big gold bug, they call them, someone who’s really into metals, but I have had a very small single-digit percentage of our net worth in metals because it is a good portfolio diversifier. When there’s inflation, it goes up.
There are ways you can physically own gold. You can buy it from websites and have it shipped to you. You can buy it and have it stored somewhere, or you can buy paper gold. There are ETFs that essentially will track gold, platinum, and other metals and such. That is the only one that I personally own. I’m not really into commodities.
Commodities have these really long bear and bull market cycles where you can go 20 years in a commodity bear market and it’s just awful. It’s not something that I’ve experimented with. There are commodity index funds you can buy, but they use futures. They don’t actually own the commodities, and so there’s this drag on their earnings that makes them not something that I’ve invested in. Again, not financial advice to not do it. Obviously, you can look into it, but personally, we own some precious metals, mostly paper precious metals, and have not gotten into commodities.
A big thing during inflation is to own real property and have less cash. That’s kind of the idea that your cash is being devalued and real property like real estate, whether it’s a home or whether it is commercial real estate, even owning REITs, which are Real Estate Investment Trusts. They’re like index funds in real estate. Art, collectibles, stamps, wine, I know some people who do that, or owning bare land. These are real properties and they tend to go up with inflation.
Now I did hear a podcast. I really liked the podcast Money for the Rest of Us and coincidentally named. It came after Startups for the Rest of Us, but I’ve actually talked to the host of that and he’s a really good dude.
He was saying that he looked back over those several inflationary times and that real estate actually lost value in inflationary times, which was counterintuitive to what I have understood and what I have been told. I’m not sure, to be honest, what to do with that. I think the fact that we own our home, and we own a chunk of REITs in our portfolio.
I’m certainly not going to be pulling back on those, but I’m not going to be also leaning in and increasing exposure to those at this time. My gut says that I think REITs are probably going to do okay, but it’s just it’s hard to know. We have been increasing our exposure to things like physical goods like collectibles.
The other one, which is a new one and 10 years ago wouldn’t even have been a thought, is crypto. There’s no historical data on what crypto is going to do during inflationary times, but I have been a fan for years of having a small single-digit percentage of our portfolio in all these assets so that we don’t have it all based on stocks and bonds. Having these small pockets of independence is, as David Stein from Money For the Rest of Us says, I want these pockets of independence that don’t just rely on public markets.
My gut is that crypto, if inflation happens, people are going to be putting money into that. I think we’re already seeing that. There’s been quite a boom recently in crypto. I can imagine if you’re listening to this in six months, it’ll be busting again, but that’s another place that I think is feasibly a decent hedge against inflation.
Here’s another interesting thing to think about. When we bought this home. We didn’t have jobs. It was after I left Drip and we couldn’t get a home loan, so we paid cash for the house and we didn’t have a mortgage. Rates got super, super low to the point where I don’t like having cash tied up in real estate, and I never really wanted to own real estate again, but there was a whole conversation Matt Wensing and I had on Twitter Spaces the other day about owning versus renting and how I actually believe that renting is a better thing for entrepreneurs.
I think that we don’t factor in the costs of owning a home and all of the extraneous stuff. In fact, I think we’d be better off keeping that money liquid investing in ourselves, our businesses, and other things than owning a home. Yet two years after selling our home in Fresno, we bought a home in Minneapolis. Why did we do that? Well, I don’t believe it’s the best financial decision, but we were having trouble finding really nice homes to rent. We’re having trouble finding homes that fit our family, then we could remodel or we could work on, and make our own, and that was the trade-off for us.
While I am not a gung ho proponent of owning homes from a pure financial position, I definitely have seen firsthand that it can be hard to meet your own personal life goals if you don’t own your home. If you want that feeling of not being able to be kicked out with 30 days notice, being able to paint, remodel, own it, and being able to pick whatever house you want, in essence, that you can afford rather than having to stick to certain areas, certain neighborhoods, or even just certain homes that happen to be for rent at that time.
For me, it’s kind of the personal side, personal desires, and happiness to the family versus purely a financial decision. All that said, we didn’t have a mortgage on the house and we took one out. We borrowed money against a home that we owned fully. One, to get liquidity because I hated having that money tied up that I could be investing in anything else. All the stuff I have going on and I have it sitting in residential real estate is not exciting to me.
The other reason is because during inflationary times, if you take out a loan that you’re going to pay back over 20, 30 years, you’re paying that back in the future with inflated currency. If your money’s worth X% less each year and your house payment stay the same, you’re actually paying less and less and less over time for that.
It’s kind of an interesting hack that if you haven’t thought about, it is really a benefit, I’ll say of inflation. There are a lot of drawbacks to inflation, but one of the benefits is if you take out a loan and the loan payment is fixed that you’re actually taking advantage of the other side of it.
A couple of final things, obviously, I believe in having an emergency fund of cash that you can access quickly. In inflationary times, it’s not ideal to have a big bucket of cash sitting around because that’s going deflate, but I keep it within reason. It’s not like I’m going to go down to zero cash or something like that because that’s just not a prudent financial decision.
Certainly, we’ve decided to have less cash sitting around than maybe would have six months or a year ago. I’ve often believed in having dry powder, having cash in an account to take advantage of opportunities that come along, whether it’s oh, this business is for sale, this amazing piece of art, or this silver age, golden age comic book has come up. It only comes up once every few years. It’s expensive and cash is king and queen, basically.
Cash allows people to move quickly and get things done. We tend to keep more cash than I think just an emergency fund would dictate so that we can take advantage of financial opportunities that come along. There’s a big dip in crypto, there’s a big dip in something else and we can kind of swoop in and buy the dip, so to speak. If you don’t have any cash, you can’t do that, but in these times, we definitely are keeping it a little less.
Then there are bonds. There are bonds and stocks, which I think I’m going to round us out with. Bonds are tough because bonds don’t do well and inflationary times. We do own some bonds, I have a lot less bonds than I think some advisors would have you do an 80–20 split. For me, given us as young as we are in our investment timeline is so far out, I cannot imagine having 20% of our net worth tied up in bonds. All that said, I am nearing the trigger to basically sell most of our bonds. I haven’t made up my mind on it yet and I do need to look at it.
It’s December right now and I need to look at if we sell, do we have capital gains? Can we offset it with other losses, or should we just wait another basically three weeks to get us to January one meaning that we won’t have that gain until the following April? It buys us 16 months before we have to pay any tax on that. I’m noodling on it.
I know there are some folks who I’ve talked to and I’ve written in saying absolutely basically liquidating all my bonds because I believe inflation is going to do this and get worse. I’ve honestly talked to a few friends who I think are pretty smart, who have said no, I’m not selling my bonds, and here’s why. I’m on the fence on it still, but definitely thinking about it. That’s something that you may want to research yourself.
Lastly, on the stock front, certainly, dividend stocks and stocks that can raise prices that do have pricing power, those companies tend to do well during inflationary times. What’s a trip is that growth stocks do not. Growth stocks are tech stocks where they’re probably not generating as much cash or net profit today as they are betting on. They’re priced for future earnings. They’re priced at 50x or 100x earnings when realistically, maybe the stock market is priced on average at what 5, 10 times earnings and it depends on the type of stock and all that.
If something is priced at 50x or 100x earnings, people are saying, oh, in the future, this company is going to get really big. When Facebook first went public, its valuation was astronomical and people were betting that Facebook would grow into that valuation. Well, that’s not great when inflation is happening because those companies are betting on future profits, future revenue, future profits, and so growth stocks tend to get hit because of the sell-off as people move to stocks that are paying dividends or stocks that have large profit pools today because today’s money is worth more than tomorrow’s or next year’s money.
For me, our portfolio is not the majority in public stocks, and we don’t own individual stocks. We own a lot of index funds and we are balanced pretty far across all the metrics that you could imagine in terms of the US markets and non-US markets, emerging markets, and established ones.
There’s growth and there’s value, and we have a slight bent towards value. Realistically, I am not personally going to be messing with our stock allocations because we don’t have a bunch of fiddly bits in our stock portfolio. If you do and you have growth stocks individually, you have some dividend, and just revenue-generating stocks, it’s probably time to at least think about maybe making an adjustment.
Now here’s the thing, this is not timing the market, and I don’t believe that we can time the market. I don’t believe I’m smart enough to time the market because you have to be right twice. You have to be right when you sell and you have to be right when you buy, otherwise, you miss it. Often the market is so unpredictable that trying to time it, to me, is a fool’s errand and I wouldn’t do it.
I’m talking about any of these changes that we are making in our portfolios, I’m doing them very gently. It’s moving assets from here to there. Maybe it’s moving a chunk of them, maybe if I want to move 10% from one thing to the other, I do it 2% at a time over a few weeks. It’s like dollar-cost averaging across. Sometimes I do rip the band-aid off, I’m going to be honest, but I like to kind of lean into it, get a feel for it, and not make quick decisions that feel like I’m trying to time some big thing. Stocks are overvalued, I’m going to sell all my stocks. I’ve never done that and I don’t think we ever will.
Even in 2008, 2009, we sold some because it got a little scary, which was a mistake because we should have rode it down and rode it back up, but I think a lot of people did the same thing. I don’t believe in market timing, and I don’t believe in selling all your stocks and buying all commodities, gold, real estate, and crypto. That to me is you’ve under diversified yourself for the case where the stock market, especially in the US, but everywhere has just continued to increase in value for years and years and years.
I know a person who said the market’s way overvalued—this is like five years ago—sold all their stock and were waiting for the downturn. Well, they’ve missed out on tremendous amounts of money, tremendous amounts of portfolio growth. Anyway, that’s my take on it. I believe that, as James Altucher says, there are three skills in terms of money. There’s making money, keeping money, and growing money.
Making money is you’re working your salary job or you have companies/businesses that are generating money or you sell them and you make big buckets of money. Keeping money is then not pissing that money away, not making stupid decisions, buying penny stocks, betting it all on something that goes to zero, or just wasting it on Lamborghinis and expensive bottles of champagne.
Then growing money is how to guard that asset that you’ve created. You sell your company for millions of dollars, you don’t put it in cash, you don’t put it under a mattress because inflation will kill that fortune that you’ve created. How do you grow money sensibly while protecting the principal? That’s really what I’m talking about here is not making these big bets. I’m talking about inflation for founders and obviously a little bit of personal finance and investing stuff.
What I’m not talking about is speculation. I can talk about speculation all day. If you want to talk to me about betting on crypto, betting on collectibles, and betting on high risk things, I’m into that and I actually really enjoy it, but that’s not what I’m talking about here today.
I’m talking about being sensible and making sensible adjustments as inflation and other economic changes occur. I hope my discussion of it today maybe have given you some thoughts or ideas, whether you want to stay the course or whether you want to make some small adjustments as things move forward.
I got good feedback on the investing for founders episode I did a couple of months ago, and given the fact that I just got back from a TinySeed retreat and it’s basically three days before the episode goes live. I knew I was doing a solo episode because I couldn’t get someone to record with me over a weekend. This idea of inflation and just given how much I’m hearing about it, both in the news and in the podcast I listened to, I felt like I wanted to lay down some thoughts.
Thank you so much again for joining me this week. I really appreciate you coming back every week. If you’re not subscribed, obviously, hit that subscribe button. As a reminder, MicroConf Remote 3.0 started this morning, but if you head to microconfremote.com, you can still get tickets and we’ll have the videos recorded that you can listen to and then you can do the live attendance and be part of the hallway track.
Thanks again for joining me this week and I’ll be back in your ears again next Tuesday morning.