In this book, we have talked about the importance of diversifying among the six asset classes, but there is an eighth asset class that you must diversify into, and this class is cyberspace, or the Internet. The Internet, in my opinion, is the final asset class. It is the asset class of the 21st century. If you've transformed your freelance writing business from a lone operation into a team of employees, you have already invested in this asset class. Just working as a freelancer alone will not allow you to use this asset class to its full potential. Remember, an object can only function as an asset if it grows in value and or puts positive cash flow in your pocket without you having to work.
As a freelancer, because you are still working for your money, this does not qualify as an Internet asset, even though you are using the Internet as a tool to build wealth. You won't be able to truly use the Internet as an asset class until either you reach the level of investor, or grow your freelance operation into a full fledged business. One way in which you can use the Internet as an asset class is to invest in an Internet business which pays you positive monthly cash flow, like the many other asset classes discussed in previous chapters.
However, there are a number of differences between an Internet asset class and traditional assets such as real estate, stocks, bonds, or businesses. The primary difference is that the Internet is digital, while all these other assets are physical, with the exception of stocks and bonds. This means that the asset exists in a space which is beyond the physical world; it exists in cyberspace. There are a number of powerful implications that this has for your long term wealth if you're able to see it.
Unlike physical space, cyberspace is infinite. A piece of real estate can only take up so much space. There is a limit to how much land you can buy, and there is also a limit to how much gold and silver you can buy, and how much space you can reserve for its storage. Most traditional businesses are physical, which means they're located in a specific jurisdiction where they are subject to specific laws. For instance, while an apartment complex can be a great investment, some states in the U.S. have laws which stipulate that the property can be confiscated by the government if your tenants are involved in any criminal activities, regardless of whether or not you're aware of it.
The Internet asset is more powerful than the other asset classes simply because it exists in a world beyond the physical one. It doesn't have to pollute rivers, or require zoning, or be subject to the regulations that physical businesses are subject to. An Internet asset can also be moved from one location to another, a task which is difficult or practically impossible with traditional asset classes. If the government of any given jurisdiction decides to regulate the Internet within that region, the owner of an Internet asset can simply relocate this asset to a jurisdiction which is more friendly. I will talk more about this in a moment. However, to truly understand the power of the Internet asset class, think of eBay.
This company was founded by Pierre Omidyar in 1995, and like Jeff Bezos and other Internet pioneers, Omidyar is today a multi-billionaire. This online auction site earns in excess of $8 billion annually, and it begin as a simple concept: a website where people could put up their items for auction, and other people could bid on these items in order to purchase them. While the physical auction concept has been around for a long time, the Internet auction was totally new, and unlike a physical auction, the auctioneer isn't limited to the number of people who are in the room. Instead, he gets access to a global audience. Not only did Pierre Omidyar become rich as the founder of eBay, but since its inception, this website has also allowed many auctioneers to themselves become millionaires.
The power of eBay is truly astounding when you consider the following facts:
- eBay earns money 24 hours a day, seven days a week, and 365 days per year.
- Unlike most physical stores, with eBay there is no such thing as a closing time.
- Unlike most billion dollar corporations, eBay has well under 20,000 employees. Compare this to Microsoft, which has over 89,000 employees, Walmart, which has over 2 million employees, and McDonald's, which has about 400,000 employees.
- Compared to most large corporations, eBay is low maintenance. Its business is primarily generated through its website, and there is very little need for the company to maintain warehouses or factories, since if manufactures nothing and auctioneers are often responsible for shipping.
These four facts show that eBay is the definition of an Information Age business. While McDonald's and Walmart are more or less 20th century enterprises, eBay is a powerful picture of the future, a world in which digital corporations earn billions of dollars a year, 24 hours a day, and they do so with low overhead and a relatively small number of employees. This is the wave of the future, and in order to acquire the Internet as an asset class, you will either need to build a business like this from scratch, or purchase one from someone else. Regardless, a portion of your wealth “must” be earned through the Internet, in addition to the other asset classes.
Because cyberspace is both global and infinite, the rules which governments have used in the past to control and regulate physical corporations are ineffective over the World Wide Web. For instance, in 2006, the United States passed an anti-gambling law which targeted online gaming sites, which were generating billions of dollars per year. While the reasoning for this law is up for debate, many people in the online gambling industry felt that the government was going after these online companies because they were difficult to tax, and instead of trying to tax them, the government instead chose to outlaw them altogether.
Regardless of how you may feel about online gambling, you have to wonder why the U.S. government would be willing to pass laws banning it when large physical casinos operate in Las Vegas, Atlantic City, and other regions of the United States. The only logical conclusion is that these physical casinos are allowed to operate because they can be easily taxed, and shut down if they don't pay their taxes. Online casinos, on the other hand, are a totally different breed. Because the money is being generated in cyberspace, it is hard to tell where the money is going, or to whom.
Not only are the owners of the online gambling companies making money, but many of the customers who gamble at these sites are making money as well, and neither may be paying taxes. Instead of dealing with the complexities involved with regulating this 21st century industry, the U.S. government has instead chosen to make it completely illegal. The problem is, while this simple tactic may work with traditional brick and mortar businesses, Internet businesses are completely different. For instance, the 2006 ban on Internet gambling has done little to curb this industry, since many of the industry leaders have simply relocated their websites and servers outside of U.S. jurisdiction. In addition to this, many of these Internet gambling companies continue to serve U.S. customers.
In my personal opinion, the Internet is the ultimate asset class, and the primary reason for this is simply because it is one of the few asset classes that can easily be moved from one location to another. You can't move real estate, you can't move land, and if you have a physical business such as a convenience store, this can't be moved either. What this means is that your business can be easily confiscated or shut down by the government is they decide to do so. Whether or not this will happen is beyond the scope of this book. However, the fact remains that the Internet business is the most mobile asset class in the world.
It is also the least visible asset class, and as I implied in earlier chapters in this book, the things which aren't seen are often the things which are the most powerful. Imagine owning a website that makes $100,000 per month, with very little maintenance, and which can easily be moved anywhere in the world. This is the power that the Internet provides, and few other asset classes offer this level of flexibility.
Of all the eight asset classes discussed in this book, the Internet is also the fastest when it comes to the speed in which money can be earned. The reason I say this is because with traditional businesses such as restaurants, you have to leave your home and get the food, or in the case of the pizzeria, you may be able to have it delivered to you. However, in the time it takes you to go out and buy food, or have food delivered to you, you can purchase multiple items on the web. If these items are digital, they may be made available to you immediately after purchase, meaning there is little need to wait for them to be delivered.
Online companies are capable of making money at much higher rates of speed than traditional businesses, especially businesses such as restaurants, convenience stores, and even real estate. For instance, if you own an apartment complex, you will be paid monthly once all the tenants pay their rent for that month. This means you have to wait 30 days between paydays. If you run a convenience store, you have to wait for customers to come into the store before you will get money.
With the Internet, it is possible to earn money at every minute of the day, and in the 21st century, those who are able to make money at the fastest speed will be able to build the greatest amount of wealth within the shortest period of time. While this power can be obtained with traditional corporations, it requires immense manpower and resources, which is the reason why Walmart has over 2 million employees. While both Walmart and eBay are constantly making money at all times of the day, eBay does it with far less overhead, and with much greater speed.
While some may say that Internet websites which generate positive cash flow should be put under the “business” category asset class, I disagree with this, and the reason for this is because the differences between Internet companies and traditional enterprises are so strong that Internet businesses deserve to be put into their own asset class altogether. The only thing that Internet businesses have in common with traditional businesses is their ability to generate positive cash flow. But the similarities end here.
One of the biggest differences between eBay and a company like Walmart is that eBay keeps most of what it earns, while Walmart does not. To understand this, lets make a comparison between the two. Walmart's revenue for 2009 $404 billion, which is a truly fantastic number. In contrast, eBay's revenue is $8.5 billion. On the surface, it seems obvious that Walmart trumps eBay by a large margin. However, once you evaluate the actual net income of both companies, a different picture emerges. Walmart's net income is around $13 billion, which means, out of $404 billion, this is the money they have left over after paying for their expenses and operating costs. In contrast, eBay has a net income of $1.7 billion. What is obvious from these numbers is that eBay is a keeping a much larger portion of its earnings than Walmart, and in my opinion, is more profitable in proportion to its revenue.
The reason for this is because despite the fact that Walmart generates almost a half trillion dollars per year in revenue, since it is a physical corporation, much of this money has to go to pay for physical expenses. Ebay, which is an Information Age business, is digital and has little need to rely so much on physical expenses, and as a result, it keeps a larger portion of the revenues it earns.
This is why I feel that digital businesses, in general, can be proportionally more profitable than their physical world counterparts since the expenses they have are much lower. When this feature is combined with a reduced need for many employees, the ability to generate money at a high rate of speed, and the ability to moved around the world with relative ease, virtual companies in my opinion are superior to traditional businesses in practically every way.
Once you've mastered all the eight asset classes, the sky is the limit, and your wealth will stand the test of time. I personally feel that is is one path towards reaching the status of a Forbes Top 400 member. However, reaching this level is not as important as making sure your wealth can be passed down to future generations, and by diversifying into the eight asset classes discussed in this book, this scenario is very likely.