Sunday, April 19, 2015

Brass Balls (Listent to Your Inner Coward)

Where does one get the balls to do things like start their own business or invest in Real Estate?  Beats me!   When you've got nothing to lose, it is a lot easier.


Today, a reader writes, asking how I was able to start my own law practice only two years out of law school.   Wasn't I nervous about failing?  Wasn't I taking a big risk?

Well, yes and no.   In reality, what seemed like "ballsy moves" in my life were real no-brainers.  They were opportunities that even at their worst, would result in no negative impact to my life.

Let me explain.

When I started in the Patent Business, it was a Wild West Show.  The Federal Circuit had been formed in 1982 or therabouts, and the Polaroid v. Kodak case was one of their early decisions.  In case you missed it, Polaroid sued Kodak for infringing its instant camera Patents.  A Kodak VP had written, in red ink, across a memo from their legal department, "screw the Patents!" and Kodak made their own instant camera (now a collector's item!).

And in the pre-Federal Circuit days, that was a pretty good strategy.  Patents were pretty worthless until about 1982 and before Polaroid v. Kodak.   But when that decision came down, not only did Kodak have to pay damages to Polaroid, they had to shut down their factory, cease making the products, and recall all products in the distribution chain.  The damages were enormous.   And people woke up and realized that Patents were now a "thing."

Of course, 20 years later, both Polaroid and Kodak are bankrupt or nearly bankrupt or are post-bankrupt (who cares, really?) and these once-great companies have been supplanted by a new technology, the digital camera.   But I digress.

In the late 1980's, everyone wanted a Patent, and the number of Patent Attorneys was small.  I was in the right place at the right time.   A friend of my parents, a Patent Attorney, said, "Bobby, you gotta get in on this Patent game, it is a license to print money!"  And back then, we charged $20,000 or more for a Patent Application.

Today, my clients have a "cap" of $8,000 per case.   Same clients, too.

I worked for a big firm and I enjoyed the work.  I got a chance to work on some litigation, wrote a number of Patents, prosecuted hundreds more - all before I graduated from Law School.   So I had the Experience.

But I realized that litigation was not for me.  And I realized that writing and prosecuting applications was more my thing.  And I also realized that for every dollar I billed, I was getting 33 cents, if that.  Moreover, that wasn't going to change.   Law firms are a pyramid scheme, and only a few of the young associates will claw their way to the top of the pile.  Most will leave, over time (as Engineers leave tech companies) and no one, of course, likes to talk about that.

No, instead, young associates believe in the "story arc" of life - that they will bill their hours, suck up to the boss, and then make senior associate, junior partner, senior partner, and then named head of the firm, over time.

Nice theory, but in practice, it is impossible for everyone to do this.  At most firms, only a handful float to the top of the cesspool.  And I realized early on that while the partners liked my high billing and quality work, they were not going to let me be part of their little club, now or ever.  And I saw, firsthand, what happens to senior associates who don't make partner.  Good friends of mine, pushing 40, with a photocopy box of desk mementos, doing the walk of shame to the elevator, while everyone else looks away.   It is like when they take one of the horses off to the knackers.  All the other horses say, "Well, that will never happen to me!" - but of course, it will.

I left that firm to work at another - a place where I thought I could write and prosecute cases and over time do well.   The partners of that firm hired "outside consultants" to advise them on how to run the firm, as they had lost their way.  The outside consultants suggested that they tell us Associates that none of us would ever make partner but instead the best we could hope for was some sort of "non-equity Partner" track, equivalent to a senior associate.   It was probably a dumb move - everyone updated their resume that afternoon.   Within a year or so, the firm was no more.   I left long before that, of course.

I had a chance to leave the firm and start out on my own.   And I had a client who indicated obliquely that if I left the firm, I probably would get some work from them.  They liked my work, they didn't like my firm's billing practices.  And without the huge big firm overhead, I could charge a lot less and make a lot more.

So I became "of counsel" to a small firm in town that had extra office space to rent out.  I paid a lot for that office space, but of course, it included a phone line, a photocopier, and a receptionist.  And I did pretty well.

I had a small mortgage payment, no car payments, and no cable bills to pay.   Mark's salary was enough for us to live on, if necessary, and I had a little money in the bank.   And if it all went horribly wrong, I could always go back to work for some other law firm, as they were hiring like mad back then.   Worst case scenario?  I could go back to the Patent Office and work there - get paid well, four weeks of vacation, and a cushy retirement.  That was the worst-case scenario.

So the "risks" were really minimal - in that market.

Today, the legal market is different.  Some folks hang out their shingle right out of law school.  I talked with a young couple recently about this, and I recently went to a law conference about the same topic.   Many young lawyers are hanging out their shingle right out of law school, simply because they have no choice in that others are not hiring young attorneys with no experience.  Others simply don't want to work the 60-80 hours a week in some litigation "Sweatshop" but instead want a different lifestyle.

Either way, there is more risk today, but then again, for some, there is no other choice.  So hanging out your shingle doesn't seem so risky when the "worst case scenario" is unemployment and you are already there.

After a year on my "own" (still "of counsel" to the small firm) an opportunity came up to buy an office building in Old Town, Alexandria.  The Real Estate bubble of 1989 (the one that "never happened" according to some readers!) had burst, and by 1995 there were still bargains on the market.   The office building had been recently remodeled, but the owner had died, and his business partner wanted to unload it.  We bought it with a "nothing down" deal, with the business partner taking back a second mortgage as a down payment.

Again, it was a "nothing to lose" deal and the "worst case scenario" was that I would default on the loan and the bank would take it back.   But that didn't look likely, as the monthly carrying cost of the building was far less than I was paying in "rent" to the firm I was "of counsel" of.

Along the way, we made a lot of mistakes.  I learned a lot about running a Patent practice - and how not to run one.  Overall, though, we did OK.   Eventually, I decided to stick to a solo practice, writing and prosecuting cases.  And by the year 2000, working from home didn't have the stigma it did back then, so I moved my office home and rented out the office building for a net monthly profit.

And we bought more Real Estate along the way.  Again, it was a "no brainer" - we were buying properties for below market value and with a positive cash flow.   And we didn't over-extend ourselves either.  We could have bought much more, but were glad we didn't.   The "worst case scenario" for our purchase was that we might be forced to sell them for more than we paid for them.

Others were not so lucky - well, not unlucky, just not very smart.   Friends of mine, seeing me make money, decided that buying any piece of Real Estate at any price and not even bothering to rent it out would make them "rich".   Not surprisingly, they went bankrupt - twice.

And a lot of America did the same thing.   Again, I learned from what was going on around me.  When I saw that friend of mine press the "down" button on the elevator at the big firm, with his cardboard box of family photos, I knew that could happen to me and likely would if I stayed there.

Similarly, when I saw my friends doing really dumb things with real estate investing, I realized that the inmates had taken over the asylum and it was time to get out.

Brass balls?  Hardly.   Selling while the selling was good was a sound move, and the people who told me I was a "fool" for selling out, well, I personally thought they were fools - with all their happy talk about how the market "would always go up!" and how "you'd better buy now or be priced out of the market forever!!"

So that's it, I guess.  No real heroism, no bravery, no brass balls.  In fact, in reality, I am an utter coward, a point that was driven home to me about 15 years ago when we tried to drive a motorhome through Mexico, and were kidnapped by the Police.  But that's another story.

I wasn't brave when I hung out my own shingle, as I had a pretty good indication I would have a steady income - I had a client.   And the "worst case scenario" was that I would end up working as a drudge for someone else's law firm or back as an Examiner the Patent Office.

Similarly, when I invested in Real Estate, the "worst case scenario" was that I would break even.  No heroism there.  And my cowardice saved me, as it force me to sell it all before the market crash of 2009.

Maybe there is a pattern there.  When you talk to veterans, even those decorated for bravery in combat, and you say, "Gee, you are brave!  You are a hero!" they inevitably reply, "No, not really, I just did what anyone would do in that situation."   Few of us are Sargent Slaughter, leading a raid into Nazi machine gun nests, with guns blazing from each arm, and pulling the pins of hand grenades with our teeth.  That is the stuff of fiction - of movies.   In fact, in real life, that sort of "brave" guy gets gunned down.

The survivors are the ones that thought it though and acted strategically.  They took risks, yes, but not foolhardy ones like charging a machine gun nest.   Suicide charges?   That's what brought down the Japanese Army.

So to me, real bravery isn't starting your own practice or investing in Real Estate, but the poor slob who works at a law firm, day in, day out, for 20-30 years, hoping for a promotion, hoping to make some money, but never quite getting to where he wants to be - or having a chance to enjoy life.   It is the bravery of facing a firing squad, five days a week, for 30 years.

Of course, it is a lot easier at age 35 to say, "Well, what's the worse case scenario?  Starting over?"   At age 55, I can tell you, I don't have the balls to try that.   No, my inner coward says, "take even fewer risks, today!"

Because I am looking at another 10 years before I collect Social Security and the name of the game now is "don't rock the boat."   Buying another investment property scares me to death. And investing more than a few thousand dollars in any one thing seems to me to be putting all my eggs in one basket.

So, if you want to do ballsy things, do then when you are still relatively young.  Because as you get older and older, the inner coward kicks in, big time.