Rich Karlgaard is Publisher of Forbes magazine and columnist for Forbes’ “Innovation Rules.” He’s the author of, “The Soft Edge: Where Great Companies Find Lasting Success.”
Karlgaard has been publisher at Forbes since 1998. He discusses how the business model of Forbes Magazine has evolved since the disruption of the Internet and digital media. Karlgaard explains what Forbes is doing to compete with the online players in business information, such as Agora Publishing and the Motley Fool.
Karlgaard then talks about the pluses and minuses of hiring passionate people and how hiring managers can identify passion. He describes how destructive cynicism can be to a corporate culture and how companies can better incorporate trust.
(1:14) Following up on previous podcast about inflation and 1984 cost of living
(13:07) Reminder: Little Rock Creating Wealth Seminar and property tour
(13:58) Introducing Rich Karlgaard
(14:19) Rich Karlgaard discusses his latest book
(27:45) On taking a career perspective when working within a company
(29:54) On the power of story
(34:51) Rich Karlgaard discussing his book Life 2.0
(42:19) Comparing the cheapest places to live
(46:27) What’s been going on at Forbes Magazine
(52:59) Closing comments
Rich Karlgaard, angel investor, board director and Wall Street Journal best-selling author, is the longtime publisher of Forbes magazine.
He also writes the Forbes column, “Innovation Rules,” which is known for its witty assessment of business and technology. Karlgaard has been a regular panelist on television’s Forbes on FOX show since its inception in 2001.
Karlgaard is also a serial entrepreneur. He has launched two magazines (Upside and Forbes ASAP), the venture capital firm Garage Technology Ventures and Silicon Valley’s premier business and technology forum, 7500-member Churchill Club. He is a past winner of the Ernst & Young “Entrepreneur of the Year” award.
Karlgaard was raised in Bismarck, North Dakota, and graduated from Stanford University. He lives with his family in Silicon Valley.
ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, this is episode #397. Thank you so much for joining me today. Our guest today will be Rich Karlgaard. You’ve probably read his work before, or heard of him. He is a writer for Forbes, and he’s a well known guy, and he’s going to talk about his book The Soft Edge with us today. So, we’ll hear about that, and what’s going on at Forbes as well.
Following up on previous podcast about inflation and 1984 cost of living
JASON HARTMAN: I wanted to follow up, first, on the last podcast, where we talked about inflation. And we talked about the cost of living back in 1984, the Orwellian 1984 that is becoming all too true in so many ways, and we talked about that, but I didn’t give you a comparison in today’s dollars! As to what some of those things look like. And I wanted to just very, very quickly do that. And it was kind of inspired by looking at this USA Today article from a little while back, but it talks about how $1 million will not be enough for retirement. One of the things that we’ve got here in the environment that really was promulgated and started and promulgated by the, as they call him, the maestro, the ridiculous amount of recognition that Alan Greenspan had, our former Fed chair, before Bernanke, who left us in a huge mess. He left a lot of things, just basically timed his retirement very well, I’ll put it that way. That policy, the Bernanke, and the Greenspan policy, and probably the Yellen policy, too, we do not know yet. Pretty much has punished all the people who have done the right thing. All the people who have delayed gratification, all the people who have saved money—they can’t get any yield in this type of environment.
And it’s really, in some ways, the worst of both worlds. Because we have, in real terms, when you adjust for reality, not using the consumer price index, but using real inflation, we have a negative interest rate environment. So, that benefits borrowers, but it hurts savers. It hurts the people who delayed gratification, but it really benefits the people who use debt as an advantageous way to arbitrage that environment. So, in a deflationary environment—and by the way, this is very telling, and very interesting, because before this podcast, I went and I went to Bing. Notice I did not say Google. Yes, I’ve converted. I’m getting a little paranoid about Google.
And if you don’t understand why, just go back and look in the archives, look for the show I did called Search and Destroy, where I interviewed the author of that book, who talked about Google, and some of their things. That’s kind of a different topic. But I use Bing nowadays, for my search engine. Gotta help the underdog Microsoft out, right? Anyway, I went to Bing, and I Googled—no, not really—I searched deflation calculator. That’s interesting. Deflation calculator. Guess how many results? Zero. It corrected me, in fact, and it said, did you mean inflation calculator? No, I meant deflation calculator. Because as I’ve mentioned, in an inflationary environment, my investment strategy is nothing short of awesome. Okay? It is far and away the best strategy out there. And that involves the ultimate investing equation that you’ve heard me talk about so many times on prior episodes. In a deflationary environment, my strategy is also good, it’s just not as great as it is in an inflationary environment.
So, I typed deflation calculator, thinking that I can simply talk to you about how in a deflationary environment, people cannot get yield. There’s just nowhere to get yield in the investment markets. So, what your strategy is, as an income property owner, is to just hold that property, because it’s not going up in value; it might be deflating in value. But hold it for income. And rental income, although it could potentially deflate in this theoretical deflationary environment, which is very unlikely. In fact, it’s so unlikely that on the entire Internet, there’s not even a calculator for it. There is no deflation calculator. Because I wanted to calculate how in a deflationary environment, income every month, or savings, actual increase in value. Because the dollar becomes more powerful. it has more purchasing power. It has more buying power. Deflation, benefits savers. Because their savings can buy more. And so, that’s a great thing. But, usually, almost never is deflation the case. Right? Inflation is the way of the world in a fiat money world.
I wanted to calculate how, if you’re getting $200 a month, or maybe $2500-$3000 a year, let’s just annualize the number. $200 and change per month on one income property, and you hold that property, and you simply milk the property for yield; I wanted to calculate for you, our dear listeners, what your return would be in a deflationary environment. Say we have 5% deflation, or 10% deflation. Or maybe even 20% deflation. Where that income, that monthly income on that rental property, becomes more valuable. Not less valuable. It becomes more valuable. All of that income buys more for us. That’s deflation. Very unlikely scenario. Most likely, of course, is inflation. There is no calculator, I guess. I would just have to manually calculate deflation. But you can pretty much do it in your head. The only problem comes is that it’s harder to compound the deflationary benefits. But you can just look at it on an annual basis.
So if you’re getting $3000 a year in income from one property, and maybe you have a portfolio of 10 properties, and they generate $30,000 a year in income—now, that’s just the income, that’s not the multi-dimensional characteristics. Just one characteristic, the income. In a deflationary environment at the beginning of the year, that $30,000 that the 10 properties create for you, is worth what it’s worth. It’s worth $30,000 at that snapshot in time. But at the end of the year, $30,000, at 10% deflation, is really worth what? It’s worth $33,000 in real dollars! Because the value of the dollar actually increased. Imagine that! This is so incredibly unlikely that it’s, you know, it’s almost humorous, right? Imagine that! Well, that’s what would happen. I can’t really compound that for you too easily without using a real calculator, and using some real math. Just understand that the yield actually appreciates in value. Unlikely scenario.
Most likely scenario is you hit a home run through inflation. And let’s look at some of the examples I shared with you on the last episode, and how those impact things. So, I talked about the 1984 cost of living. And I shared with you that in 1984, a new house cost $86,730. Well, adjusted for inflation, now this is just according to the bogus official government statistics; this is not reality. Reality shows that inflation is always understated. In today’s dollars, guess what? Because I used an inflation calculator—that was the only thing I could find! Maybe Google has it, but Bing didn’t have it. I don’t know. In my inflation calculator, this is really amazing. The cumulative amount of inflation—I hope you’re sitting down, and you can be prepared for how much most people’s wealth has diminished since 1984. I mean, this is a startling, shocking, depressing number. And remember, the reality is, it’s worse than this. Because these are just using the official statistics that understate true inflation.
129.4%. Yes. That’s how much anybody’s savings has gone down in value, or their stock portfolio, assuming the stocks are even, but they’re not, really even, of course. They have adjusted for inflation. This is money in the macros, okay? The yield is a different number that will actually make this a little better, and the wound won’t be so bad. But cash has lost 129.4% of its value since 1984. And that wasn’t that long ago, folks. So, that new house that cost $86,000—I’ll just round off, to save time—is now $199,000. The average income back then, $21,000 per year; adjusting for inflation, now, that average income has to be $49,500 per year. And guess what? The household income average in the United States is right about $52,000? I should have looked that up, I don’t have it off hand. Here’s the kicker. Here’s the killer, actually. That’s household income. This was individual income. So, people are losing ground, in most cases, because household income is usually, the mom is working as well, not just the husband of the olden days. It’s a two-earner situation. So, household income definitely Americans have been losing ground in real dollars. And of course, adjusted for inflation, it’s really worse than the official stats.
Okay, let’s look at a new car. Well, a new car in 1984 was $8700. And now, it’s $20,000. Adjusted for inflation. Oh, I didn’t do the Harvard tuition, which back then was only $9000 per year. Adjusting that one, I’m sure that’s way out of whack. But get these, you’ll like these next two comparisons here. A movie ticket. Tell me if you can go to the movies for this price. In 1984, it was $2.50. And now, adjusted for inflation, the movie ticket should cost $5.73. Well, I just saw a movie this week, and it was $11 for my ticket. Not $5.73. So you see how this gets out of whack? Check out the next one. Gasoline. A gallon of gas in 1984 was $1.10. Adjusted for inflation, the cost now should be $2.52. But is it? No. It’s quite a bit higher than that. Depends where you live. If you live in the Socialist Republic of California, you’re probably paying, I don’t know what it is nowadays. But it’s probably $4.50 a gallon, somewhere in that ballpark. If you live in Arizona, which isn’t so bad, I think gas is about $3.60. But in either case, it’s certainly not $2.52, is it? No, it’s not.
So, you see how the reality is much worse, or, if you’re following my plan for investing, much better, than the government would have us believe. You get paid to borrow money in inflationary environments, because inflation transfers wealth from lenders to borrowers. From bondholders, who are lenders, to borrowers that are on the other end of those bonds. So. Investing for inflation, following my plan, will benefit you in a huge way. But even if we have deflation, although we can’t even find a calculator on that subject, you will benefit, because it will be one of the only places that you can get any yield on your investment in a deflationary environment. And that is income property, the most historically proven asset class in America, if not the entire world.
Reminder: Little Rock Creating Wealth Seminar and property tour
JASON HARTMAN: Let’s get to our guest, Rich Karlgaard, and before we do, I just want to remind you, join us in Little Rock, Arkansas; we’re going to have a great Creating Wealth Seminar, where we’ll explore many of these topics in great detail and great depth, and then we will have a property tour where you can look at some fantastic properties on Sunday. And that’s at the end of September, so, register for that at www.jasonhartman.com. I know a lot of you have been registering, so I’m looking forward to seeing you. And I did talk about some of the logistics on the last episode, because many of you have asked about flights, and so forth. And by the way, we do have a great hotel for that, and we’ve got a nice room block rate, and the hotel is less than one year old. So it’s a really new, swanky hotel. Right in downtown, where we can walk to everything. So it’ll be great. We’ll look forward to seeing you there toward the end of September, and here’s today’s guest, Rich Karlgaard.
Introducing Rich Karlgaard
JASON HARTMAN: It’s my pleasure to welcome Rich Karlgaard to the show! He is publisher of Forbes Magazine, and a columnist for Forbes Innovation Rules, and author of two books, including his most recent, which is entitled The Soft Edge: Where Great Companies Find Lasting Success. And he’s coming to us today, I believe from Silicon Valley. Rich, welcome. How are you?
RICH KARLGAARD: I’m great to be here!
Rich Karlgaard discusses his latest book
JASON HARTMAN: It’s good to have you on the show. Tell us about your latest book! Let’s kind of start there.
RICH KARLGAARD: Well, the book is called The Soft Edge: Where Great Companies Find Lasting Success. As I was looking at this precarious American recovery, which statistically started five years ago, and a month. June will mark the fifth anniversary of the statistical end of the great recession. But the recovery, across the country, has been weak, and very uneven. We’ve averaged 2% GDP growth as a country since coming out of the recession. Normally the US economy grows at around 3%. In fact, it’s averaged 3% since the end of World War II to the present, and that’s inclusive of 11 recessions, including the one we just went through. And yet we’re only growing 2%. We’re statistically out of a recession. When we’re not in a recession, we should be growing at twice that rate.
JASON HARTMAN: God forbid we adjust GDP for inflation. Then we’re really in trouble.
RICH KARLGAARD: Yeah. Yeah. And Steve Forbes could talk all about inflation, because it’s not showing up in government statistics. It’s not showing up in the CPI, but it’s showing up in a lot of other places right now. The dot com market—I mean, all kinds of assets are weirdly overvalued right now.
JASON HARTMAN: Yeah, there’s the CPI, and then there’s reality.
RICH KARLGAARD: Yeah, the CPI and reality for sure. In trying to figure out what was going on, I started traveling around the country, talking to companies, CEOs of companies large and small, publicly traded, privately held, across a variety of industries, to see what companies were doing to come out of this recession. You know that 70% of Americans still think we’re in a recession? And what they’re telling us, really, is that they’re not employed, or that their careers are stuck, or that they’re working for companies that are stuck. So, I wanted to see what these unstuck companies and careers were doing that was different from the ones that were stuck. And that led to several inquiries and several dozen interviews, and eventually the book The Soft Edge.
JASON HARTMAN: When you say The Soft Edge, what does that mean?
RICH KARLGAARD: Well, The Soft Edge is that part of your company that can be best described as your cultural values. Let me back up and say why it’s so important to look at cultural values within a context. Last August, I was in Memphis talking to Fred Smith, who’s the founder and CEO and chairman of FedEx.
JASON HARTMAN: And I must just mention, I was recently in Memphis, and went by his rather modest home.
RICH KARLGAARD: That I didn’t get to do. But the offices are pretty modest too. I expected FedEx’s headquarters to be at the airport where the superhub is, or perhaps downtown next to the FedEx forum, where the Grizzlies play. It’s actually in a pretty quiet suburban industrial park.
JASON HARTMAN: Well, you know Rich, he only got a C- on his paper for FedEx, so…
RICH KARLGAARD: We were talking, and he was talking about the importance of strategy. And what often happens when you’re the chairman of a publicly traded company like FedEx, is that at board meetings you end up spending 80% of your time on audit committee issues. Naturally, because you have to be compliant to the SEC, and because every director has personal liability, that’s where people spend time. And Fred said it’s such a mistake, you’ve gotta spend your time talking about strategy. Who you are, where you’re going, who your customers are, the effect of pricing in your industry, your competitors, the disruptive threats. And all of a sudden, when we started talking about that, and then we started talking about the importance of execution, and then the importance of cultural values, I got this idea of the triangle; he was talking about three distinct things that are all interlinked in a healthy company. And you know there’s a human metaphor here. And that is, the United Nations has this very simply diagnostic device called the Triangle of Health.
So when a doctor—let’s say a Doctor Without Borders goes into a poor area and has to see a thousand people in a week. All that doctor can really do is triage. So if you’re healthy, we’ll put you over here; I’ve gotta really find out who the unhealthy people are, and spend time with them. The Triangle of Health helps them do that, and it’s simply this: is a) the person physically healthy? You can tell that within a couple of minutes. B) are they mentally healthy? There are questions you can design to trigger answers that let you know if that person has a grip on reality. Which is really the definition of mental health. Doesn’t mean that you’re happy all the time. And then c) what about social health? Is there crime at home, is there economic opportunity? Because you could be physically healthy and mentally healthy, but if you live in certain parts of Damascus, Syria today, then your prospects for long term health aren’t that good. So what Fred was really doing, was describing a triangle of company health; the great companies that are healthy today, and have a reasonable chance of being healthy going forward in a very volatile and uncertain economy, are good at three things: strategy, execution, and the cultural values. Now, the cultural values often get neglected by a lot of CEOs. Particularly those that are more analytic and numeric in nature, and it’s simply because of the ROI attached to cultural values is fuzzier than it is attached to say, execution. If you invest in technology, and that technology makes you faster, or lowers your price of goods, or gives you better insight into your supply chain, that’s pretty easy to measure, and therefore the investments that you make in those executionaries are easily validated. But when you invest in things like trust, or organizational learning, or teamwork, it’s a little less determinate, and therefore, it takes more intuition, but really good companies, like FedEx, somehow find a way to do that.
JASON HARTMAN: Mhmm. And they’re coming up with ways to measure these soft edges, these fuzzier things. But still, much less quantifiable, as you mentioned, than some of the hard things that are really easy to measure.
RICH KARLGAARD: Let’s take an example here of a company that I really admire: Northwestern Mutual Insurance Firm. $25 billion in size, $220 billion of assets, $1.5 trillion of contract. This is a Milwaukee, Wisconsin based company that’s been around since 1857. Now, when you think about life insurance, and disability, and annuities, and all of that, you would think that this is a company that Wall Street, or even Silicon Valley, could disrupt pretty easily. Because all you’re talking about in the insurance industry, really, when it comes down to it, is actuarial probabilities, and then coming up with some algorithm to run through those actuarial probabilities, and then price goods and services dependent on those numbers for people. And yet, Northwestern Mutual has this army of middlemen, commissioned salespeople who carry Northwestern Mutual cards but are in fact self employed people, working on commission only, who are out there making those ten calls a day, ten cold calls a day, to get three appointments to get possibly one new customer. And they get up every day, and they do that every day. Now, what kind of a company can create that level of trust and passion that a commission-only sales force will get up and do that? This is where things get really interesting. Because it’s just, it’s not that clear. There aren’t standard metrics that will tell you how to do that. But they have figured out how to do that. Consequently, Northwestern Mutual is the leader in the United States, because it is trusted by its employees, and it’s trusted by its customers in ways, again, that you just can’t quite put your finger on.
JASON HARTMAN: In the book, you call this the force multiplier of all things good. And that is trust. I know that we can’t put our finger on it—especially with the sales force, because I think anybody listening who has a company, wants to focus on that. I mean, you know, working on customer trust is possibly somewhat simpler, I think. Or, at least, hopefully more widespread. Do the right thing, accept returns, listen to your customers, have good customer service; those processes are maybe a little more definable than that HR side of it. You know, that’s somewhat definable too. But what do they do to get these people to do all of this based on these commission-only jobs? That’s very interesting.
RICH KARLGAARD: Well, I’ve really been trying to figure that out. What I’ve found is you’re absolutely right; the trust goes in both directions. Northwestern Mutual is trusted by its customers; what does that mean? It means that the claims are usually paid. That Northwestern isn’t one of those contentious companies that’s always battling the claims. It doesn’t mean that they won’t battle claims, but as John Schlifske said, the very ownership structure of Northwestern Mutual biases them towards paying the claims. The mutual comes from the fact that they’re owned by their customers. So John Schlifske, the CEO, is never in the position where he has to say, well, is my first allegiance to the shareholders, or is it to the policyholders? They are one in the same at Northwestern Mutual. That really helps on the outside. On the inside, what Northwestern Mutual does, it just—it’s a very ethically run company. Its leaders walk their talk. They live fairly humbly for CEOs and upper level executives. They have their employees’ backs. I shouldn’t even describe them as employees, because they’re independent business people. But they do carry Northwestern Mutual cards, they get health insurance, and things like that.
And, Northwestern really runs interference on compliance issues. Just sort of the nuts and bolts of making sure that the insurance agents are all within compliance, it’s a pretty regulated industry. So, all of those things add up. And what you get, Jason, this is the amazing thing to me. If you’re really good on your execution side of your business, what you’re doing is you’re accumulating a lot of marginal gain. If you can lower your cost of operations by 1% per year, that won’t make a difference in any given year. But both kind of marginal gains add up over time. Or if you can get faster in the delivery of your products and services to the marketplace. Or if you can improve the speed and efficiency of your supply chain of logistics. Or if you can use analytics to give you new insights into customer behavior. Every great company seeks those marginal gains. But on the cultural side, and trust, you sometimes get these transformative gains, and I describe the salesman at Northwestern, who suddenly increased his productivity by his own estimate, not 2% or 5%, but five fold, when he began to trust his career. And when he began to trust his career, was when he was at a funeral for one of the few clients that he had who wasn’t doing that well, and the daughter of the deceased man got up and said, #1 I miss my daddy, and #2 I know we’ll be okay. All of a sudden this salesperson goes, I’m not just pedaling insurance which nobody likes to talk about over the kitchen table; I’ve actually sold something that has provided some financial [unintelligible], and a safety net, to this eight year old girl and her mother. And all of a sudden, his whole attitude about what he was doing changed.
JASON HARTMAN: I’ve definitely won over some of my employees that way, when they really get to see the difference they’re making in people’s lives; when they really feel like they’re getting up for a reason. That they’re really helping people. And that is far and away, a very powerful thing. More powerful than paying them a little more money. Most people, healthy people, I think, want to know that they’re really doing some good in the world. They want to feel like they have a mission, as Simon Sinek talks about—discovering your why. Or, start with why. And I couldn’t agree more.
RICH KARLGAARD: Yeah, he is absolutely right. And speaking of Simon Sinek, Simon was the keynote speaker last year at Northwestern, and reported on in the book. So yeah, I had a conversation a couple weeks ago. This didn’t make it into the book, but I wish it had. It was a conversation with Howard Behar. Now, Howard Behar was the president of Starbucks from 1989 to 2003. So, I guess you have to be named Howard. Founder and CEO and chairman, of course, is Howard Schultz. Now, Howard Schultz is like a lot of great entrepreneurs, like Jeff Besos, like the late Steve Jobs. Really focused, has a vision in his head about changing the world and so on and so forth. But is not naturally the most empathetic character. You’ll never find, in any CEO, all the traits that it takes to succeed. That’s why great CEOs always find their complements inside their organization. The people that they can—that have the complementary skills. And so, Howard Schultz, very driven and focused, perhaps due to the fact that he grew up in the projects of the outer boroughs of New York, and never had anything handed to him, was very driven and focused about scaling Starbucks as fast as he could.
He hired this guy named Howard Behar from the retail industry, and Howard soon saw that somewhere between 50 stores and 400 stores—and that isn’t much, by Starbucks’ standards today—but this is what was going on during the early 1990s. That they were growing so fast, and not taking care of their employees to make sure that their employees felt that they were on this larger mission that you talked about, you could see the service falling off. And Howard Behar, who is very attuned to those kinds of things, could see it. And he called time out on the expansion. At which point, of course, he got into a big argument with Howard Schultz. And like the adults that they were, they argued this out, and hashed it out, and finally Howard Schultz says, I don’t really understand what you’re talking about, Howard, but I trust you. Let’s make empathy, and let’s make treatment of our employees, the number one thing around here. And to this day, it’s one of the reasons that Starbucks has been able to scale as fast as it has, while still preserving that really great customer service that you get anywhere in the world.
On taking a career perspective when working within a company
JASON HARTMAN: Good points. We’re talking with Rich Karlgaard here, and we are going to shift our focus here in a few minutes and talk about his first book, Like 2.0: How People Across America Are Transforming Their Lives By Finding The Where Of Their Happiness. And so, we’ll talk about that too. I just didn’t want the listeners to think this will be solely a discussion of big corporations, and what they’re doing and so forth. And with that in mind, Rich, I wanted to ask, you also, in the book, take a career perspective for one’s career, if they’re working within a company, and some thoughts for them, and what it means to them, The Soft Edge, right?
RICH KARLGAARD: If a person feels stuck—if you feel stuck in your career, or you’re an entrepreneur and you feel stuck early on, and everybody’s gone through that period where you feel stuck, where you aren’t making as much progress as fast as you hoped that you would, [unintelligible] trying to instill a great diagnostic device, because it means that possibly you’re stuck on the strategy of your career. That is to say, maybe you’re out of position. Maybe you’re doing a thing that is really not to your strength and passion. And if so, [unintelligible]. Because all great strategy starts with knowing who you are, and knowing what you want to do. Knowing who your competitors are, knowing what the state of the art is in your industry, knowing the dynamics of pricing in your industry, knowing the disruptive threats over the horizon—these are all strategic questions that apply to your career as well as your company. When it comes to execution, you can’t waste time, you can’t waste money, you’ve gotta have a plan, you’ve gotta stick to that plan.
Companies have supply chains, but people have individuals that they work with, who are part of their own personal supply chain and so forth. And then, finally, you get to that third side, and they’re all of equal importance, where building trust with your colleagues, getting on a path where you’re increasing your own learning as fast as you can, learning how to tell stories that inspire people to follow you, these are all soft edge virtues that apply in a career too. So if you’re stuck, number one, go around that triangle and see where you might be stuck. Two, then ask yourself is it worth the time and effort to really get good at those things that I’m weak in, or, in the case of the two Howards at Starbucks, is it really better, and more efficient, to find somebody who’s my complement, both inside the organization if you’re in a larger organization, or if you’re an entrepreneur, perhaps a partner.
On the power of story
JASON HARTMAN: Definitely having a partner, accountability, and looking outside, and getting different perspectives, all of those things, very, very important to success in any endeavor. I wanted to ask you about one more section of The Soft Edge before we move on and look at some of your other work, and talk a little bit about Forbes, and so forth. The power of story. I think that’s just critically important. Organizations have stories, people have stories, and stories are a tremendously powerful way to illustrate points, to get people to remember things. They’re better taught through story, aren’t they? And I’m not exactly sure where you take it when it comes to The Soft Edge, but tell us about your thoughts on the power of story.
RICH KARLGAARD: Humans are hardwired to learn through stories. Business may have evolved, technology may have evolved, but we the human being, are still a critical component of all of that, thank God, and we’re just now [unintelligible] anything like a speedy and evolutionary path. Stories that human beings respond to have been constructed along similar mechanisms for almost 3000 years, starting with the Greek storytellers, and so on through today. And what people really respond to is what the historian Joseph Campbell called the Hero’s Journey. And that is, you know, too many companies make the mistake of telling a story that is what I call an immaculate conception story. The customer came to us, we solved his or her problems, and we all went away happy. And a Hero’s Journey is that of somebody who’s not ready to take on the responsibilities that are suddenly thrust upon them, and yet they persist, and they go two steps forward and one back, and they grow along the way, and we get to see them grow along the way, and then there’s usually some dramatic conclusion to it. The great movie director John Ford, who directed John Wayne, and some of John Wayne’s best Westerns, described it as follows. The bad guy shows up, while the hero is still evolving. You know, doesn’t that apply to Luke Skywalker, or Star Wars, or any number of stories that you really like? Companies, particularly in this age where authenticity means everything where social media will out you if you’re not authentic, learning how to tell your story in that Hero’s Journey narrative, and learning how to take your customers through the Hero’s Journey, and making your customers feel like heroes, is a great technique today. And, you know, it’s something that companies are gonna have to master when customers can talk back to them. I had a story in my book The Soft Edge about an airplane company Cirrus, and its own customers, who wanted to tell the Cirrus story in a different way than Cirrus itself was telling their story, and they had a great argument about it, and in the end, the customers were right, and they won!
JASON HARTMAN: Tell me about that! I’m curious. Because I bought a Cirrus once. I didn’t finish the deal, but I started to buy one.
RICH KARLGAARD: How bout that! I’m an owner myself, from 2006 until 2010. Well, of course you and I know that the reason we’re attracted to the plane is because they had a novel device of the parachute.
JASON HARTMAN: Yeah, right.
RICH KARLGAARD: So if your engine conked out over hostile terrain, or you became disoriented in the fog, or whatever it was, before you crashed, you could pull the chute, a little rocket would fly up through the roof, the parachute would follow and bring down the whole airframe, and the plane would be damaged, but you would walk away.
JASON HARTMAN: Occasionally, a couple of those airframes have actually survived the parachute, which is pretty good.
RICH KARLGAARD: Some of them have been rebuilt; there have been 44 pulls, and they’ve all—parachute pulls, and they’ve all been successful. Here’s what’s so sad about that. Cirrus didn’t invent it, but they were the first company to get it certified in an airplane through the FAA, and really, the first plane of any kind that offered this already built in. And it was a tremendous, a tremendous innovation, and Cirrus made the cover of the New York Times, Sunday Magazine in 1999, and very recently Cirrus was able to come out of nowhere and become the largest dollar volume single engine aircraft manufacturer in the world today. But here’s what happened. It was just tragic. Cirrus’ lawyer said stop promoting the parachute so much. And Cirrus said, well why? The lawyer said, it’s a mechanical system. There’s no guarantee it’ll work right every time. You know, you pull a handle, a rocket has to fire, it has to break through, composite material, the chute has to unfold, there’s a lot of complexity to that. Even if it only works 99.5% of the time, that means—and this is what Cirrus had felt compelled to put into its marketing literature and operating handbook—use of the parachute may result in death. So now comes the Cirrus Owners and Pilots Association, and they were watching their insurance rates go up; pilots were dying; pilots were not aware that they should pull the chute, and all the circumstances that would merit that. They got into this big argument. Finally the Cirrus Owners and Pilots Association started holding seminars around the company to Cirrus pilots with a campaign called Pull Early and Pull Often. First sign that you think this flight might have an unhappy ending, pull the chute, you can settle it with the insurance firm later. And the Cirrus Owners and Pilots Association were able to bring down the fatality record by a substantial amount by taking over the storytelling that Cirrus itself should have done.
Rich Karlgaard discussing his book Life 2.0
JASON HARTMAN: Very interesting perspective. Let’s switch gears, because you use a lot of flight metaphors in your other book. And I didn’t know you were a pilot when we started this interview, until you mentioned Cirrus. You use some metaphors in talking about some of the inexpensive places to live, and flying on instruments, and things like this. Tell us about Life 2.0.
RICH KARLGAARD: Life 2.0—I’m glad you mention, anybody that’s gone to the trouble of becoming a pilot, as you well know, loves to talk about flying. I took up flying in 2001, and then got my instrument certification a year later. Then bought a Cessna 172, it’s the equivalent of a Toyota Corolla of the air.
JASON HARTMAN: That’s the most popular—
RICH KARLGAARD: It’s popular, reliable, and pretty safe, and I decided to fly around the country, as you said at the outset I’m based in Silicon Valley, Forbes is in New York, but after the dot com crash of 2001, 2002, I decided to go out and travel outside of New York, and outside of Silicon Valley, to see what really good entrepreneurs, particularly those using digital technologies, are doing in out of the way places. You know, it’s a wonderful way to fly around the country, and become a better pilot, and visit some promising entrepreneurs. You might find in the book—I’m so proud that I found this guy—there’s an entrepreneur in Bozeman, Montana, and this is in the summer of 2006—he had just moved out of the bedroom of his house where he’d started his company, his first offices. And two years ago, Greg Gianfote sold his company right now to Oracle for $1.5 billion.
JASON HARTMAN: Was that Blackboard? What company is that?
RICH KARLGAARD: It was Right Now Technologies.
JASON HARTMAN: Okay. What do they do?
RICH KARLGAARD: They had used the then novel technology of cloud [unintelligible] computing to automate the call center. So it was both using software to automate a company’s call center, and making it cheap using cloud technology.
JASON HARTMAN: Bozeman, Montana. Certainly not Silicon Valley, not New York City, not an expensive place to live either. This guy started a company, sold it for a billion five, that’s a billion with a ‘b,’ to Oracle. It’s really amazing how we’re able to do what many have referred to as geoarbitrage nowadays, where we can live in high lifestyle, low cost of living areas, yet we can have all of the benefits, or at least most of them, of doing business in a community, like a Silicon Valley, because we have these technologies between Skype, and Dropbox, just as long as you have a high speed connection, the world is your oyster, isn’t it?
RICH KARLGAARD: It really is, and I’m surprised there isn’t more of that. Now, Greg Gianforte was born and raised in the New York area, and he had been an entrepreneur before. Fell in love with Montana during a fly-fishing trip. He lived in three cities. Billings is the largest by population, but it’s not in the mountains, it’s not that pretty, and it doesn’t have a big university. Now you’re down to Missoula, where the University of Montana is, and Bozeman, where Montana State is. And like a lot of universities, public universities that have the world ‘state,’ these are the historical land grant colleges, which meant that they got their start in ag science, and in the case of Montana State in mining science. But in any event, still produces a lot of mathematicians, scientists, and engineers. They’re the kind of employees that Greg Gianforte wanted for his software company. So he found it all in Bozeman. Great fly-fishing, great skiing in the winter, reasonable cost of living—I mean, Bozeman, because it is a touristy area, it isn’t the cheapest place out there, but compared to Seattle, certainly compared to the San Francisco Bay area, quite a bit cheaper. And he was able to pull it together instead of, Google has to pay some of its engineers coming out of schools like Stanford and MIT upwards of $300,000. But certainly between 150 and 300, for their entry-level jobs! Greg now can pay $60,000, $70,000 for the same caliber person.
JASON HARTMAN: Austin, Texas, I’ve always talked about. if you want to start a software company, is it really that important to start it in Silicon Valley where a little two bedroom one bath house is $900,000? Or do you do it in Austin, Texas, where that same house is 125?
RICH KARLGAARD: The bubble end of Silicon Valley, and we’re not talking about Apple or Google, but we’re talking a little bit Facebook, and we’re certainly talking more about the kind of companies getting started where the sole goal is to scale as fast as possible and then flip it to Facebook. Silicon Valley still has the complete ecology, just as Hollywood still has the complete set of skills to do movies there, even though it’s more expensive. If you’re in a race against time to flip a company to Facebook for $19 billion or something like that, there’s no better place in the world to do it than Silicon Valley. But I couldn’t agree more; if you’ve got a longer term project, say a biotech company, or an enterprise software company, or something where it isn’t about a two year race and then a flip, but a five year investment or a ten year investment, I quite agree with you that Austin, Texas and places like it, may be preferable.
JASON HARTMAN: Of course, I have a real estate investment company, and we help people acquire properties nationwide, and build diversified portfolio nationwide. And in cities we vet and recommend. And the old rule of real estate is, location, location, location. And I’m not denying that location is an important factor. However, and this is a big however, compared to any time in history, in the history of humanity, location is less meaningful than ever before. Because it’s just not as meaningful as it used to be! Living in New York City, or Silicon Valley, in these very high priced areas, has its benefits. But it’s not critical. It’s not required anymore. And that makes geography just less important than it’s ever been.
RICH KARLGAARD: What you get in some of these places like New York and Silicon Valley or Hollywood, you could argue that you get the complete set of everything you would need from sources of money, to PR people, and lawyers who really understand what it’s like to work for equity, not just cash, and you know, that whole ecology. But, boy, they’re becoming so expensive right now.
JASON HARTMAN: Oh yeah.
RICH KARLGAARD: In Palo Alto, let’s just take an average suburban California home. We’re talking about a 2500 square foot home on a quarter acre. And that 2500 square foot home on a quarter acre in Palo Alto is a $3 million home now.
JASON HARTMAN: Yeah, right.
RICH KARLGAARD: And of course, the same applies in West LA, in Manhattan, and so forth. And even when you get through places like Seattle, that home is probably a million to a million and a half.
JASON HARTMAN: Yeah. It’s the law of diminishing return.
RICH KARLGAARD: Yeah, yeah.
JASON HARTMAN: It’s just a diminishing return on this.
RICH KARLGAARD: But in the interest, of course, what we know of Austin and Bozeman have in common, is brains. So, I thought where you were going with your statement about location, location, location was, brains, brains, brains. There are those combinations, and you often find them in college towns. You find the right combination of a college town, a nice physical location, I would argue that Austin is the most attractive place in Texas, because of the hill country; Bozeman’s beautiful, Boulder, Colorado’s beautiful, and so on and so on, and then if you can add the presence, and this is the only place where Bozeman falls down a bit, is that it’s more than two hours away from a hub airport.
JASON HARTMAN: Right.
RICH KARLGAARD: You still have to go through Salt Lake City or Denver or Seattle, generally speaking, to get to Bozeman. It doesn’t quite have the population mass to have enough direct flights to get there.
Comparing the cheapest places to live
JASON HARTMAN: I’m curious, Rich, and if you remember it, I know this book was written 10 years ago; you have an appendices at the end where it talks about the 150 cheap places to live. I’m curious to see how some of your stuff syncs up with some of my stuff. So, let me tell you where we are most active with our investors buying properties now, okay? Atlanta, Memphis, Houston, we’ve done some business in Denver, we’ve done some business in Austin for sure, but Denver and Austin, little too expensive, really, to make the numbers work really well. Houston, still great. Atlanta, still pretty good. Memphis, outstanding. Memphis is like this blue collar town where everybody makes $40,000 a year, and it’s the logistics capital of the US, and those jobs aren’t moving too easily.
RICH KARLGAARD: Yeah. And thanks to St. Jude’s, and another hospital, I forget the name, but it’s where Steve Jobs had his liver transplant.
JASON HARTMAN: Right, right. He became a Tennessee resident to get that new liver, because that was the fastest place you could get it in the nation. So, he changed his residency to do that. But you know, Houston has energy, it has a huge medical complex, it’s just really intriguing the massive disparity in prices in some of these places. I mean, I’m a Californian, mostly. I moved to Phoenix three years ago, lived in West Los Angeles—very expensive area—as a kid growing up, and then Orange County, Irvine, Newport Beach, as an adult. Two very, very expensive areas. I just find that since moving, I’m a lot happier. I just think that, you know, so much is determined by the price of real estate. The stress level of everybody around you, you know; there’s that old saying, even if you win the rat race, you’re still a rat.
RICH KARLGAARD: In Silicon Valley it looks more like Manhattan to me. Now I don’t mean physically, but its industries are almost purely algorithmic industries today. What gave Silicon Valley its name, and the name was coined in the late 1960s by former San Jose Mercury News business reported, was the silicon in the semiconductor plants. So it was companies like Fairchild Semiconductor, National Semiconductor, Intel, later Advanced Micro Devices. Then you had the PC revolution, led by Apple and others, you had the disk drive revolution led by Seagate and others, then another transformation in the network computing with companies like Sun, and then Cisco moving forward, and then all of a sudden in the late 90s with the dot com boom, it becomes much more of a software driven place, and now it’s almost purely software. Algorithmic. You know, New York’s in the algorithmic industry. With algorithms it makes financial trading schemes, or the algorithms of publishing or entertainment—it’s all code. And so what you’re seeing in Silicon Valley, in terms of real estate, that at the epicenter of Silicon Valley—it used to be that the epicenter of Silicon Valley was in San Jose, because that’s where the semiconductor plants were. It’s really—you got two epicenters. The big one is in and around Palo Alto. Then you got the secondary one in San Francisco. Now, it was inconceivable that you would have technology going in San Francisco in any of these previous areas, because they required space and lower cost real estate. But these purely algorithmic companies, they can work in cramped spaces, just as companies do in Manhattan. And commercial real estate prices in San Francisco, and in Palo Alto, have just soared! And yet when you go, not that far outside, you see that they’re having—the prices are up, but you don’t see the vitality. So, literally the footprint of Silicon Valley has shrunk, even though if you plotted it on a vertical line to represent wealth, it would be going to the moon.
JASON HARTMAN: Part of that, I think, is the reason there’s really no silicon in Silicon Valley now, is the environmental issues. Of course, the cost of real estate. But the regulatory environment has just chased a lot of that business out. That’s my hypothesis, at least.
RICH KARLGAARD: There aren’t that many fabrication plants left. I think Intel shut its last one down in Arizona, right? Or it’s about to do that. You’ve got one in Oregon, you’ve got, you know, companies in Idaho, but there aren’t that many of them anymore.
What’s been going on at Forbes Magazine
JASON HARTMAN: I know we’ve gone for a long time, and this has been an interesting discussion, but tell us a little bit about what’s going on at Forbes Magazine nowadays!
RICH KARLGAARD: Forbes was started in 1917 by Steve Forbes’ grandfather, an immigrant who came from Scotland. We’re in our, what would that be, our 97th year.
JASON HARTMAN: Wow.
RICH KARLGAARD: We’re looking forward to our hundredth year in three years. The company’s always been owned by the family, by Steve’s grandfather, and then famous father Malcolm, and then Steve and his brothers. In 2006, facing some of these deep technological changes that we knew we had to make to stay competitive in a world where everything is moving to the Internet and very fast, we took private equity from a Silicon Valley firm called Elevation Partners. One of the partners is the rock singer Bono that is really a Silicon Valley firm, and of course, that [unintelligible] that Elevation would some day want a liquidity exit to get their investment and their profit out of it. So, the company has been for sale; it’s been open, publicly known for about the last six months. It’s interesting to watch. So much of what Forbes has done to reinvent itself using capital from Elevation—you know, we’ve discovered that we can be a really strong technology platform, as well as a media company. A lot of companies right now are licensing our technology platform. American lawyers licensing our technology platform, as are others. A lot of people are recognizing the power of our brand. There’s commercial real estate developer in Manila, in the Philippines, who’s appending the name Forbes to some high-rise office building, so instead of seeing the word Trump, you see the word Forbes. So all around the world—
JASON HARTMAN: So that’s a licensing deal? Forbes on an office building?
RICH KARLGAARD: That’s a licensing deal.
JASON HARTMAN: Oh, how interesting.
RICH KARLGAARD: Ashford University, an online university—there’s a physical Ashford in Iowa, but the main organization’s in San Diego, licensed the Forbes name to do a Forbes MBA program within Ashford University. So we’re seeing all kinds of opportunities that wouldn’t have been possible before, and it’s very exciting. What Steve and his brothers and Elevation are working on doing, is finding the buyer who’s going to #1 meet the financial goals of both parties, but #2, that really, really in a deep way understands what makes Forbes unique in the world, and how there are these huge opportunities, not just associated with media, but with technology and licensing, that are bigger and global.
JASON HARTMAN: Very interesting. Boy, I never thought of that idea. Putting the Forbes name on an office building, because Forbes is business. You know, it’s the capitalist tool, as they say.
RICH KARLGAARD: Yeah, isn’t it amazing?
JASON HARTMAN: And how the Trump name—he’s licensed that to residential and hotel properties around the world. So, yeah.
RICH KARLGAARD: Well, the interesting thing, Jason, where the Forbes brand has real power, is in parts of the world that have only recently discovered free enterprise and capitalism. So, China and all of Southeast Asia, from the Philippines, to Indonesia, to Vietnam, and then sweeping through the Middle East in more forward looking countries like the United Arab Emirates and so forth, and then in Eastern Europe, and in South America, it’s just, we have tremendous power that we didn’t even know that we had.
JASON HARTMAN: When did you start your career at Forbes?
RICH KARLGAARD: I was hired by Steve in 1992 to start a magazine called—that we ended up calling Forbes ASAP.
JASON HARTMAN: I remember that.
RICH KARLGAARD: It was a futurist magazine that was a quarterly, soon went to six times a year. Steve hired me because I had started a Silicon Valley magazine with a friend called Upside, at the dawn of the desktop publishing revolution in the 80s, where with a Macintosh, a laser printer, and some software, you could create a magazine. So desktop publishing, you did what the web has done to a greater extent; it so lowered the cost of entry, that you could become a publisher.
JASON HARTMAN: Soon everybody will be a manufacturer, with the 3D printer.
RICH KARLGAARD: I don’t think 3D printing’s gonna happen quite as fast as some of its advocates say. Maybe we can have that debate at another time. But yeah, one day that’ll occur. But that’s what desktop publishing did in the 2D, rather than the 3D space. Steve’s attention was caught by the fact that I was getting four hour interviews with the likes of Bill Gates and others at Upside, and Steve said, you know, we need that, and he hired me to start Forbes ASAP. So that was 1992. And then in 1998, Steve and his brothers named me the publisher of the magazine, but left me in Silicon Valley to write columns, give speeches, help our salespeople open doors, and all the things that I do.
JASON HARTMAN: Is Forbes ASAP still around?
RICH KARLGAARD: No, it was—there were a lot of magazines, technology magazines that got very fat with advertising in the 1990s. And then most of them didn’t survive. You might recall there was a magazine specifically on Silicon Valley kinds of companies called Red Herring.
JASON HARTMAN: Oh, I remember that one.
RICH KARLGAARD: And there was [unintelligible]—
JASON HARTMAN: And the Weekly Standard.
RICH KARLGAARD: There was the Industry Standard.
JASON HARTMAN: Or the Industry Standard, yeah.
RICH KARLGAARD: Well, the Industry Standard was really interesting. Because in the year 2000, it sold more ad pages than any magazine in America.
JASON HARTMAN: I remember.
RICH KARLGAARD: And then a year later it was out of business. That’s how fast it all disappeared after the dot com bubble popped.
JASON HARTMAN: The higher they fly, the faster they all, Rich.
RICH KARLGAARD: I guess. Well, what made it worse, getting back to real estate, was, at the peak of the market in the San Francisco commercial real estate market in 2000, before it popped, the guy who started the Industry Standard expanded, and got himself into some really long term expensive commercial real estate leases. And then the pop, and there was no money to pay, and so, that’s the danger. You know, if there’s a bubble in the Valley now, it’s not in the Valley, it’s in San Francisco. Because you’re in San Francisco, they use the commercial construction cranes everywhere. I haven’t seen that many commercial construction cranes since the year 2006, in Miami.
JASON HARTMAN: Yeah, that’s a bad sign. If you—you know, I used to say that the national bird of China should be the crane. There’s a lot of commercial construction and cranes in their cities, too.
RICH KARLGAARD: Yeah, 80%, I think, of the world’s big cranes. That’s the figure I’d always heard tossed around. In San Francisco, it’s just incredible, the way these buildings are going. I mean, and San Francisco, that in itself, because it’s a very politically progressive town with a lot of NIMBYs, the fact that it’s happening makes it even more impressive. But I think that’s where the bubble will pop, is in commercial real estate in San Francisco. I suspect that that’s poised to come down 20%.
JASON HARTMAN: I would agree with you. We don’t like markets like that that are expensive and high flying, because they just—you can never get the rents, and especially in a landlord-unfriendly place like California in general, the rents will just never sync up with the prices. The valuations—the rent evaluations are so out of sync, it’s just crazy. So. The conservative way to invest is as a cash flow investor, not a capital appreciation investor. And that’s what I like. Rich, give out your website, tell people where they can learn more about you; of course—
JASON HARTMAN: Well Rich Karlgaard, thank you so much for joining us today.
RICH KARLGAARD: A pleasure, Jason.
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