#22 Passive Income is a Lie

Recently Voima Gold reached out to us for an interview to better understand some of our motivations and thoughts behind the website. You can find the article Voima published covering our interview here, or if you’d prefer, listen to the full audio of the entire interview.

Let’s talk about passive income. It’s a term you hear thrown around a lot these days, and my guess would be that this idea has been made popular by the prevalence of passive investing and the facade of risk free return. We touched on this a little bit in Issue #17.

My friend Vake, recently made a comment that is understandably controversial with how many people view the world today. But I think his words sum up this concept very well.

All income, whether that be in the form of selling your labor, acting as an entrepreneur, or speculating on the future with capital (or a combination of the three), entails a certain level of risk and reward. The underlying risk of any venture, whether it be labor, entrepreneurship, or speculation, is the risk of that venture being unprofitable. This is a foundational principle of markets. Likely the least risky of these three is labor, but again it depends on exactly what type of labor you are doing and whether or not you are also assuming the role of an entrepreneur.

As humans we have three types of resources: accumulated capital, time/energy (labor), and knowledge. How we choose to deploy those resources is a constant value decision. It is in our best interest to deploy those resources in the most profitable ways. For some people, that might mean working a minimum wage job flipping hamburgers, until they can acquire either more capital or more knowledge in order to move onto more skilled labor or entrepreneurship.

In acquiring capital, there is no free lunch. There is no such thing as risk free return. All ventures entail a risk of loss of one of your three resources. Rental properties, 401ks, online content libraries…all of these things which the unsophisticated equate with “passive income” are one of, or a combination of the three things above. They all entail a certain risk that whatever time/energy/labor/capital you devote to them will be unprofitable.

Rental property is entrepreneurship with a high, upfront capital risk. In the event you use debt to acquire a rental property that risk is leveraged. That isn’t to say it cannot be profitable. But it is far from “passive income”. Successful entrepreneurship requires active management (whether that be by you or another which you’ve hired).

401ks are a speculative equity bet that the companies to which you’ve allocated capital will be profitable, and provide you with financial return either in the form of dividends or appreciation of the underlying equity value. Passive index investing is merely substituting that decision making process over to a 3rd party, but your return is not guaranteed or risk free. Though there is an illusory guarantee thanks to the “magic” of central banking.

Online content creation is entrepreneurship. There is a huge risk that content you create will never be profitable. No matter how much the guy selling you a $500 “passive income” course tells you its a sure thing.

I’ve been producing content online for years. Both written and in the form of multimedia. The screenshot above is just the amount of time I’ve spent editing and mixing video and audio content over the last several years. Much of the content I’ve produced is not only now irrelevant but never earned me a single dime (and never will). That isn’t to say its impossible, but to call it “passive income” is to misconstrue the entrepreneurial process.

A potential long tail distribution on profitable return for online content or books you’ve created is not passive. It carries the same level up upfront investment (time/labor, capital, knowledge) as anything else. My friend has a fantastic lecture series explaining some of these concepts in more detail.

As a rule: Anytime you see the words “risk free return” or “guaranteed profit” you should run in the opposite direction.


Book of the Month:

The Ethics of Money Production by Jorg Guido Huulsman

-“Money is omnipresent in modern life, yet the production of money does not seem to warrant any moral assessment”

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