What to Expect Contacting Family and Friends in Network Marketing

Getting involved in a network marketing company, you often are told to contact family and friends. Some people are fine doing this, but the majority of people in the business dread having to do this. For the seasoned MLM veterans, they dread this because they already know what they will say. As for the newer people in the business, they have absolutely no idea what these people in their lives will say, which is why it is intimidating to do. Knowing what to expect can make the process a little easier, although it will not necessarily change your results.

When you know what your family and friends will say when you approach them about joining your MLM business, you will be able to adjust the approach accordingly. The most common response people in the network marketing world get is that they are not interested. Most family and friends do not even listen to your pitch or your reasons why they would be a good fit into this business. They main reason they brush you off so suddenly is because they figure that, since they know you, they are not offending you. It almost gives them the right to say no without letting you finish.
 
In addition to having them interrupt you to tell you their answer is no, you also will have many family and friends laugh at you or even make fun of you. This is because people not in the business do not understand the need for network marketing or MLM. It is not that they disagree with it. They simply do not understand it. This can be a frustrating response to many people in network marketing. They had thought that they at least would get something out of the people who mean something in their lives. This typically is not the way it is.
 
Every once in a while you will find a family member or friend who is interested in learning more about network marketing. Because this is so rare, many newer MLM companies are not forcing this dreaded task onto you. Can you imagine how much easier your life would be if you did not have to contact your family and friends.

PIPE Funding Through Direct Public Offering is the “New” Venture Capital

What is PIPE funding?
Let’s begin with the definition of “PIPE funding” and how it differs from venture capital, private equity and other investment vehicles. PIPE stands for “Private Investment In Public Equity”. It is essentially the process resulting in hedge fund, venture and/or private capital investment into a registered public company in exchange for equity ownership, normally at a discounted price.

What is the relevant history of PIPE funding?

In the fourth quarter of 2007 there was a dramatic increase in the amount of funding provided to public companies due to the credit crunch extraordinary strains now inherent in the sub-prime marketplace. According to Robert F. Kyle, Executive Vice President of Sagient Research the PIPE market hit historic levels in 2007 with over $45 Billion raised in the fourth quarter alone. That one-quarter total exceeded any annual total over the past twelve years.

Why is PIPE funding growing so quickly?
Mark Twain once said “I am more interested in the return of my investment, rather than a return on my investment.” This statement echoes the primary advantage to an investor found in PIPE funding with regard to exit strategy. When an investor makes an investment into a company, a major concern is exit strategy. With PIPE funding the company is public therefore the investor has control over his or her ownership and can buy more, or sell at any time. Private companies normally cannot provide investor liquidity until an exit strategy is identified and executed which normally comes at great risk and over an extended period of time. This is the reason PIPE funding has increased over the last 12 years. Another benefit of investing in public vs. private entities is disclosure. A public company is required to disclose financial information and is regulated by the SEC. Investors all over the world, including hedge and venture fund managers, institutional bankers and individual investors, view this information. Another main advantage for a public company is the ability of management to retain control. Venture capital and angel investors normally demand board seats and majority voting rights. In our experience, companies that take their company public and attain PIPE funding maintain majority ownership, allowing them to execute or modify their strategy to achieve the company’s growth objectives as they see fit.

Does your company qualify to go public?
Not every company is positioned to be a public company and we advise that companies always seek counsel from an industry expert specializing in PIPE financing and the DPO process.

- Would your friends and family invest in your company? If not, there is little chance anyone else would. This might sound simplistic, however in our experience this is perhaps the most powerful litmus test of all.

- Does your company have the potential to reach a national or even global market? For example, a local flower shop with 10 locations would not be in a good position to go public. However a flower shop with national growth aspirations such as nationalflowers.com may well be a viable candidate due to its national market plans and growth strategy.

- Does your company have a strong and experienced management team? A strong management team is the backbone of any company. Over the years we’ve seen a sharp increase in the number of start-up and early stage companies going public to raise capital. However, to attract investors these companies must demonstrate consistent revenue growth and/or a history of success within a related industry. We often use the example of a local banker who wanted to commercialize a golf ball he developed and patented to distribute nationally. With no history in that field, his chances of being successful in the public offering process were diminished. However, if that same inventor had a proven history with similar development projects, his chances of going public and obtaining funding, even without existing revenue, would be greatly improved.

- Do you know how much capital your company needs? If your company is looking for less than $1 million, then the process of going public would be to costly. The typical funding opportunity for a new public company is between $1 million and $10 million. However, established companies with revenues in excess of $3 million, routinely obtain greater sums once public.

- Can the company generate cash or create value? All public companies must perform in order that their stock price continues to trend in the right direction. If a company is unable to demonstrate the ability to generate cash or to create value in the minds of investors as a private company, chances are it won’t as a public company. Half the battle for a public entity is creating interest, a “buzz”, about the company’s potential or its product or service. This is critical not only to attract investors initially, but also to help sustain the health and growth of the company ongoing. If a company has a good story to tell and a product or service that meets a need on a regional, national or global scale, then the PIPE funding process is an excellent funding solution to consider.

How much does the going public process cost?
The IPO process, which involves an underwriter such as Goldman Sacks or Merrill Lynch can cost a company as much as $10 million. Direct Public Offerings (DPO) for small to mid-sized companies where no underwriter is required because of the stock exchanges and sources we use cost around $100,000. The other major difference with the DPO process is the exchanges. Most Direct Public Offering shares are held on the OTC Bulletin Board, often referred to as Pink Sheets.

In Conclusion
PIPE funding has been increasing at steady pace over the last 12 years due to the increasing amounts of capital allocated to hedge funds and private equity groups that invest primarily in public entities. The opportunities for emerging companies, as well as investors, are tremendous.

The advantages for private companies to go public through DPO include:
- Low cost compared to IPO
- Access to a wider variety of investors
- Access to greater business growth investment funds
- Maintain operating control by the company’s management
- Higher market valuation

The advantages for the investor in public entities include:
- Access to company data and financials resulting in risk reduction
- Integrated exit strategy

Although investors in public entities may not hold board seats or maintain voting rights, leveraged ownership speaks volumes to company leaders and can be a very powerful motivation to continue to move the company in the right direction. So, “exit strategy” certainly entails greater benefits than just the opportunity to liquidate an investment.

Sound Investing in the Coming Bear Market

We are in a bear market. The stock market has essentially moved sideways or down since last July, and while it is not quite 20% below last year’s peaks, just wait. Don’t get trapped in a state of denial. The evidence is glaring-the subprime mortgage and CDO write down debacle, a host of toxic credit and debt derivatives, the banking and financial credit freeze, bursting real estate bubble, pathetically eroding value of the dollar, horrendous federal budget deficits and spending, panicky federal reserve interest rate cuts, the demise of Bear Stearns, ineffectual federal refund stimulus, bond insurers at bankruptcy’s door, an economic recession, consumer spending retrenchment, flat or eroding employment levels, an inflation CPI of +4.3% (5%-8% if including food and energy). Can you say, stagflation? Even sharply reduced interest rates haven’t helped.

The economy runs in cycles. The last real downturn was in the early ’90s. Government leaders, bankers, the media, investors are nervous. A crisis of confidence is unfolding. The excesses of the late ’90s Internet bubble, the recent real estate bubble, and the spread of junk-mortgages foisted off as AAA-rated debt, all need to be washed out of the system before there is a return to normalcy.

Wall Street Won’t Admit to Bear Market

In my book, Full of Bull, I stress the point to never take Wall Street literally. I spend a few chapters decoding the array of misleading and confusing Street directives so investors will not be led astray. One of the most adverse Street influences on sound investing is its eternally favorable stock market bias. You can’t rely on the Street to warn you of a negative outlook or high risk. It terms a falling market as “volatile,” never wanting to utter pessimistic adjectives. A market drop is a “correction,” but a recovery is never called a “mistake.” So far the stock market falloff has lasted 4-6 months, yet the brokerage research investment rating distribution is 49% Buy, 46% Neutral, and just 5% Sell recommendations. Brokerage firms generate commissions by selling to investors new and used stocks and bonds. It’s a conflict of interest. Why would they ever be bearish on the products they want to sell to clients? So don’t expect objective, cautious advice-even in a bear market-from Wall Street. The Street won’t even admit to the recession. The Administration, even the Federal Reserve, is the same, always perceiving the outlook positively. Barron’s summarizes this attitude: “Fundamentally everything’s fine, but, not to worry, it’ll soon get better.”

If you listen to Wall Street, the Administration, Federal Reserve, or the cheerleading media such as CNBC, they all claim we’ll be past these problems and rebounding again by the second half of this year. They’re all pie-eyed optimists. It’s what you’d expect. But I’m telling you, just wait a couple months, the Pollyannaish forecasts will start slipping, pushing the rebound to late this year or even into early ’09. The first bad news is never the last. It’s not a matter of a whether there will be a soft or hard landing for the economy, but rather how hard will be the landing. This is the first consumer spending-related recession since ’91-’92. It may last as long as housing prices are depressed. Election year uncertainties and the bitter medicine forthcoming next year with a new administration are not a pretty picture. Financial institutions will be chary to lend for a long time, with more bad news such as delinquent credit card debt yet to surface. Global corporate earnings are declining. The stock market is still valued at a PE multiple above the long-term trend line, and that’s not reflecting more earnings estimate reductions ahead. It seems to me that the bear market will endure well through this year and next year. Your investing should encompass this wary perspective.

Protect Your Capital

Protection of capital is paramount, especially now during a deteriorating market. Investment capital is too difficult to replace. A 35% drop in value requires a 54% recovery to get back to even. The point is don’t lose; avoid incurring whopping losses. You must assess the downside risk of every investment in your portfolio. Assume essentially the worst. Don’t look to Wall Street to disclose the lowest price potential of stocks under research coverage. Isn’t it curious how research reports indicate the upside price target, but rarely the worst price risk? Derivatives such as stock options, puts and calls, are probably the highest risk investment, given the leverage. Individual common stocks are next. Stock index funds, exchange traded funds, are slightly less dangerous. Diversified mutual funds are lower on the peril scale. After that it’s bonds, followed by cash on the risk spectrum. Take a close look at your investment mix. In the coming bear market, be sure your positions are weighted toward the safe end of the hierarchy.

There are reasons to continue holding stocks in a portfolio, even in a market fall-off. If you’re like me, you own stocks with healthy gains that you want to retain for a number of years in the future. Selling these would incur capital gains taxes, and the tendency is to never get around to repurchasing them later. And if you follow my advice in Full of Bull, they are paying respectable dividends, which represent an important income stream in your financial picture. (Historically, from 1926-2006, some 41% of the total stock market return was derived from dividends, 59% from stock price appreciation-thus, my emphasis on dividend paying stocks.) If these dividend payers were purchased at lower prices, your yield is likely to be maybe around 10% or even higher. You don’t want to give that up. The question is the portion that stocks overall should represent in your portfolio during a bad market. I believe investors should reduce their weighting in stocks by 30%-50%, even if that means giving up some dividend income for a while. It’s all about preserving your capital.

Low-Risk Stock Strategy in a Slumping Market

As the bear market plays out, the potential price decline is more limited in stocks with modest PE multiples and stout dividend yields. For sure, they are not immune to an eroding market. But their risk is far less than high valuation growth stocks. Corporate earnings are a key support factor in this scenario. PE’s don’t mean much if the “E” is not dependable. Earnings stability is a vital underpinning to help moderate stock price downside. The PE ratio can shrink, but not excessively if the starting point is already reasonable, say a PE of 10x to 15x. The stocks to own amidst a deepening recession are ones where profitability is not cyclical, at least where the earnings outlook is immune to current conditions, such as oil and gas pipelines and storage, and ocean shipping. Incidentally, this type of stock is a sound investment during bull markets too.

Dividend yield is the other important buttress. It is an indicator of financial stability, good cash flow, and quality. As I point out in Full of Bull, there is a direct, positive correlation between dividend payout ratios and earnings growth, according to studies such as one by Robert D. Arnott. This is a startling relationship. Over time, the higher the payout, the faster the earnings pace. A $20 stock that pays an $0.80 dividend, a 4% yield, is unlikely to plummet below $10 that is, an 8% yield, if the earnings and cash flow are stable. The worst case scenario is more likely around $12, a 6%-7% yield-the dividend, if safe, provides an effective safety net. And an investor should seriously consider buying more shares at that depressed level.

Consider Other Defensive Strategies

In the current troubled financial outlook, gold, in my view, is a solid investment. During a crisis or a highly uncertain economic period, gold represents a safe-haven. The weakening dollar, financial institution plight, and inflation all point to gold as a means to protect the value of your capital. Exchange traded funds (ETFs) are a particularly easy method by which to own gold as a commodity. They are a pure play, rigorously track the price of gold, are actively traded, and listed on major exchanges. A drawback to gold-related ETFs is that gains are taxed as collectibles, at a maximum of 28% rather that the 15% long-term capital gains tax on stock appreciation.

Shorting stocks is another defensive measure during a major stock market fall-off. But this is more speculative, so it should only represent a tiny portion of your investment portfolio. Betting that a stock will decline carries with it the possibility of infinite losses since stocks can rise forever but only decline to zero. Timing, volatility, even brokerage availability of shares to lend out are issues. Identify industry sectors that will be heavily impacted by the recession or other crosscurrents in the economy. Seek companies that are the most vulnerable. And select stocks with valuations that still have ample room to contract. The process is challenging since the stocks most susceptible to the dangers ahead are obvious and have already collapsed, such as in the home construction, banking and brokerage, and consumer retail sectors. You need to be on the early side and have reasonable insight. In the case of shorting, I would fervently advise cutting your losses if the shares move in the wrong direction and rise by 10%. It’s a tight leash because the risk is so pronounced. Still, shorting is a means to offset declines in your long-term, high quality, value-oriented, dividend-paying stock investments.

Accept and Be Prepared for Bear Market

The most challenging aspect of readying your investment portfolio for a major stock market falloff is recognizing the ominous conditions, the deteriorating stock market, and that there is worse yet to come. The investing element is more straightforward, determining the appropriate, expendable stock positions that can be sold to generate cash. An important goal is to establish a pile of cash, or a liquid equivalent such as a true money market fund, to relish while the rest of the market tanks. Bear markets are deceptive, behaving in a manner that disguises the downward drift. Each time there occurs a precipitous drop, it is followed by a modest recovery. It’s two steps down and one step up, just to keep you confused and to give false hope. Once bear markets are widely identified it’s too late, everything has plummeted. Bear markets move in phases, and in the end, everyone gets hurt. But this painful stage has not yet happened. Right now is about the last chance for you to alter your portfolio and tailor it for the coming bear market.

Stephen McClellan was a Wall Street investment analyst for 32 years, covering high-tech stocks as a supervisory analyst. He was a First Vice President at Merrill Lynch for 18 years, and ranked on the annual Institutional Investor All-American Research Team 19 consecutive times, the Wall Street Journal Poll for 7 years, and is in the Journal’s Hall of Fame. He was a Vice President at Salomon Brothers for 8 years, before that in a similar position at Spencer Trask, and was the industry analyst with the U.S. Department of Commerce before commencing his Wall Street career. Mr. McClellan is a Chartered Financial Analyst (CFA), a member of the New York Society of Security Analysts and the CFA Institute, was President of the New York Computer Industry Analyst Group, and President and Founder of the Software/Services Analyst Group. He has made television appearances on CBS, CNN MoneyLine, CNBC, and Wall Street Week, and given presentations to numerous organizations, conferences, and to companies such as IBM, Apple, Automatic Data Processing, and Electronic Data Systems. Mr. McClellan has published articles in the London Financial Times, New York Times, Forbes, and others. His MBA in Finance is from George Washington University