Passive income for dummies

post by John_Maxwell (John_Maxwell_IV) · 2012-10-27T07:25:33.383Z · score: 17 (22 votes) · LW · GW · Legacy · 15 comments

I read one too many breathless blog posts on the virtues of passive income and decided to write a rebuttal.  Much of this should be obvious to folks with a solid economics background; in fact, please correct me if I got anything wrong.


People seem to think in an odd way about passive income.  One Helium.com author writes

I think the first time there was any money [in my Helium.com writer's account] was when it showed about 3 cents. That actually thrilled me.

...

Les called me and said "Quick, check your earnings page, tell me what you see for your credit card article (I thought, "here we go again with the 'Reddit' business"). I checked and lo and behold I had made around $4.00 in just a couple of hours for that one article he had submitted. Wow! Seriously. As the day progressed, it reached $8.00, then $10.00 and finally a little over $12.00.

Sub-minimum wages really are exciting, aren't they?  (At the end of the story, the guy has won the proverbial Helium.com lottery, and ends up making $1,246 submitting an article on how he hacked a credit card company's balance transfer offer to reddit.  If I recall correctly, this inspired a spate of Helium.com writers spamming reddit with their posts.  Probably why I ended up reading his article in the first place.)

Now I just have to think of a way to employ people normally and trick them in to thinking that the income they're making is "passive"...

But even smart people are in to passive income.  Here's Brian Armstrong, who looks pretty sharp: economics degree, Airbnb software engineer, and now Y Combinator startup founder.  His blog is largely about passive income, and he even wrote a book about it a few years ago.  So being an expert like this, we'd expect him to be making lots, right?

So first, it looks like selling people the dream of passive income is a very profitable business to be in, and actually having passive income is not a requirement for entering it.

But is that even true?  Brian reports that his high December earnings are due to book promotional efforts.  At some point, he decided to make his book available free.  Would he have done that if he was still collecting substantial revenue from it?  Doesn't seem that likely.

Does your blog really count as a source of "passive" income if people gradually stop visiting when you stop making new posts?

And second, yeah, maybe if you're a good software engineer with a good idea you can build a passive income business.

In fact, working for "active" income vs building a "passive income" business is a bit of a false dichotomy.  You can convert the cash you make through a regular job in to "passive income" by investing it and collecting interest.  And you can convert your "passive income" business in to regular old chunk of cash by selling it.

If you're interested in making more money in your off hours, starting a business is one option.  Doing freelance work is another.  Starting a business is higher variance--you could make it big, or you could waste a lot of time and effort.  You'll most likely have to do something no one else is doing, or at least do it better than everyone else is doing it, so any kind of highly specific guide or formula for making passive income is probably out.  (Ask yourself why the person selling you the guide doesn't just hire people to complete all the steps in the guide and collect the profits for themselves.)

Interestingly, however, it seems as though internet businesses may be underpriced as an investment class.  This guy writes:

I think a fair price to sell websites for is around 12 months income, depending entirely on how much time you put into the site for that income to continue. If the site is running on complete autopilot then you may be able to get 2 years revenue or even more.

...

For example, if I find a site on Flippa that is ranking well for a certain keyphrase in Google and it’s making a lot of money, I might not always be able to purchase it for what I consider is a fair price — some bidders are happy to wait over 3 years for a return on their investment.

If we assume the market price of a completely hands-off internet business is 3 years' profits, then you'll have doubled your initial investment in 3 years, since you've still got the business to sell afterwards.  Abusing the rule of 72, I estimate that this is equivalent to getting a 24% annual return on your investment, which is obviously absurdly high.  (And this doesn't even take in to account the fact that you could reinvest your internet business' earnings.)

Of course, there are reasons to be wary about getting in to internet businesses as well.  Ease of buying and selling isn't the greatest and you might get scammed.  But probably the biggest thing is the Internet's short attention span.  Google changes its ranking algorithm periodically, and beyond that, it's easy to be eclipsed by something newer and better (see MySpace).  So if I were wealthier, I'd want to have a portion of my net worth in internet businesses, but not all of it.

BTW, http://www.rolfnelson.com/ is good for rational analysis of stuff related to entrepreneurship.

15 comments

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comment by diegocaleiro · 2012-10-27T16:37:38.691Z · score: 13 (19 votes) · LW · GW

It amazes me that there is no "Sequence on how to make money in intelligent ways" or something of the sort in LessWrong. I wish there was something like "The Real 4-hour workweek" or something. I'd guess that 50-80% of people's goals would be greatly enhanced in probability of achievement if they had, say, 10 thousand dollars per month to invest on them that 'cost' 20 hours a month. Thus near-passive income correlates with "winning" Thus it is rational Thus it should be sequenced about.

comment by CronoDAS · 2012-10-27T19:42:24.189Z · score: 14 (14 votes) · LW · GW

That would be good, except that, as a group, we don't really know all that much about how to get money that isn't already part of the conventional wisdom (such as "Somehow, get a job that pays well").

comment by Xachariah · 2012-10-28T12:29:01.131Z · score: 14 (14 votes) · LW · GW

It's not because of our lack of knowledge that we can't exceed conventional wisdom, but that the conventional wisdom is so far advanced when it comes to making money.

Morality, the meaning of life, possible extinction of the human race... all of these are trivial concerns. But when you put a million dollars on the line, every non-rationalist suddenly turns into a perfect Bayesian reasoning machine or goes broke trying.

comment by gjm · 2012-10-29T01:18:38.802Z · score: 4 (4 votes) · LW · GW

every non-rationalist suddenly turns into a perfect Bayesian reasoning machine or goes broke trying

I'm unconvinced (even making allowances for the fact that you're probably exaggerating for vividity). I can think of plenty of things I've done or failed to do whose expected impact on my career (whether considered solely as a source of income, or considering the other things about it that I care about) has been negative. Akrasia, short-sightedness, lack of imagination, plain old stupidity, etc., don't go away just because there's a pile of money on the line; not for me, anyway. Do you have evidence that the rest of the world does much better?

comment by Viliam_Bur · 2012-10-29T12:50:09.159Z · score: 2 (2 votes) · LW · GW

A take it as nice metaphor (therefore an upvote), but of course not literally true.

For some people "million dollars" will always be in a far mode, so they can speak about it, but will not take one step to realistically increase the probability of having that money. Some of the rest will for a moment bring it to a near mode (usually when speaking with a "financial advisor" or MLM recruiter), just to do the unreasonable thing that the advisor recommended them.

Your description is true only for a small minority of people... although it is probably much larger than a group of people who put similar energy and rationality into existential risk etc.

comment by diegocaleiro · 2012-10-28T03:31:46.826Z · score: -2 (4 votes) · LW · GW

Some utilitarianist should post on how to steal millions before donating them in such scattered way it will be too late to get the money back (also will look bad to take money back from starving teenagers)...

comment by Unnamed · 2012-10-28T04:35:28.560Z · score: 4 (4 votes) · LW · GW

80,000 Hours has taken up a version of that project.

comment by diegocaleiro · 2012-10-27T16:38:47.396Z · score: 0 (2 votes) · LW · GW

I hate when LW edits my writing, makint it look unpunctuated. (and yes, I know how to correct it)

comment by Kaj_Sotala · 2012-10-27T12:34:59.762Z · score: 9 (9 votes) · LW · GW

At some point, he decided to make his book available free. Would he have done that if he was still collecting substantial revenue from it? Doesn't seem that likely.

Unless he thought, like many authors do, that making it available for free would actually improve sales?

comment by John_Maxwell (John_Maxwell_IV) · 2012-10-28T04:24:17.234Z · score: 3 (3 votes) · LW · GW

His writing on the page about the book doesn't seem to indicate that:

Overall I think it sold about 300 copies (so not exactly a best seller) but I learned a lot about self publishing and it was pretty fun.

comment by Viliam_Bur · 2012-10-29T13:07:56.169Z · score: 5 (5 votes) · LW · GW

Now I just have to think of a way to employ people normally and trick them in to thinking that the income they're making is "passive"...

Make a rule how much money you give them each month... and then another rule saying that you will only give them 50% of that amount in that month, and 10% of that amount in the following five months. Explain that this way, even if they take a vacation one month, they will still get "passive income" from the previous months.

Or to make it easier, use normal employment rules, just rename vacation as "days of passive income". And as a bonus, if you don't spend them all this year, you can have more the next year. Just think how cool it will be to collect your "days of passive income" from 50 years of work!

If a job is worth much more that the minimum wage, you could simply give them 1/2 of the salary, and let them have 1/2 of the year as a vacation... just call it "days of passive income" again. Sure, the salary is smaller that the competition would offer them, but working for you they get the passive income!

Now seriously...

The idea of "passive income" is so attractive, because it comes with a sense of freedom. The passive income is usually not the only part of the package; there is typically more involved. Such as: you decide the speed of your work; you can take a free day anytime you want; you don't have a boss micromanaging you or inflexible company rules.

Even without the passive income, I would love to have a work where I could just take a day off, anytime I need, any number of days in the year, just for the cost of losing 1/20 of my monthly income (or reasonably more, to cover company the fixed costs of employing me). A job where I can negotiate about getting 10 more days of vacation in a year, without sounding like an alien from a different planet (possibly from a planet where people have life, dreams, and projects, instead of being fully devoted corporate drones). Things like this are typically included in the package labeled "passive income" and they are a significant part of what makes the package attractive.

Just provide the other things typically associated with passive income, and your employees will love you. Of course if you add to the mix some rule that says "I will give you part of the money now, and part later" and call it "passive income", this will make the deal even more sweet.

comment by TheSingularityIsOver · 2012-10-30T18:34:17.224Z · score: 4 (4 votes) · LW · GW

A number of years ago my wife worked as a sales associate for AFLAC. Part of their model is that you continue to earn commission on every policy you sell for as long as the policy is active. So, if you sell a bunch of policies and the people keep on paying for them for a number of years, that income after the first year is passive income. They made a big deal out of that aspect of compensation during recruitment and to keep people motivated. I think they said something like "if you work here for 5 years you'll get paid for 10." So, some companies have figured out that business model.

comment by [deleted] · 2012-11-01T23:20:10.398Z · score: -1 (1 votes) · LW · GW

A job where I can negotiate about getting 10 more days of vacation in a year, without sounding like an alien from a different planet (possibly from a planet where people have life, dreams, and projects, instead of being fully devoted corporate drones).

Or even from a different continent of the same planet.

comment by William_Quixote · 2012-10-27T17:48:51.060Z · score: 1 (1 votes) · LW · GW

Up-voted for link at the end

comment by Daniel_Burfoot · 2012-10-27T16:15:56.162Z · score: 0 (0 votes) · LW · GW

(as a general stylistic rule when quoting text with emphasis or italics, you should indicate if the emphasis was in the original or added by you).