by Frederick Mann; 5/23/2000
ANALYSIS OF WNH MISTAKES
In the past, I've made some very expensive mistakes because I lacked certain basic money skills. My purpose in what follows isn't to make Harry Plott wrong or blame him, but to indicate that with the addition of certain basic money skills he could become a more effective businessman. Also, with the benefit of hindsight it's much easier to recognize certain mistakes, than it was at the time they were made.
I want to emphasize that when trying new ventures, especially when venturing into "unchartered territory," as Harry Plott did with WNH, mistakes are very likely. Also, many people have been "educated" to believe that "mistakes are bad." As Robert Kiyosaki emphasizes, we learn most from our mistakes. Without making mistakes it's virtually impossible to learn.
I have a high regard and respect for Harry Plott as a person and as a businessman. His courage and determination to continue doing his best to salvage a difficult situation against all odds and opposition from outsiders as well as those he serves are admirable. There are very few people in the world who don't give up and run away when faced with such a situation. I have benefited greatly from my association with Harry and my involvement with WNH.
Another purpose of this analysis is to assist anyone else who in future may want to launch a project similar to WNH. We can learn a great deal from both the mistakes and successes of others.
I believe that Harry's first mistake was that the "entry price" for WNH was too low. If I remember correctly, the minimum amount to join was $50. This resulted in a large number of members who contributed small amounts. In many cases, the costs of administrating their accounts were probably greater than their contributions.
(Quite a few WNH members probably made the mistake of putting in money they couldn't afford to lose. Some undoubtedly became dependent on their monthly withdrawals and got into trouble when the payments ceased. This underscores the importance of developing multiple income streams. No matter how reliable a particular income stream seems, it may suddenly dry up.)
The second mistake was that the WNH rules were such that someone could put in a large amount of money, then after a few months withdraw the original money, and then "let the profits ride." I got the impression that such sudden, large withdrawals caused major disruptions. The WNH rules should have been such that contributions had to be kept in WNH for a minimum period, and that notice had to be given for large withdrawals -- the larger the amount, the longer the time allowed to pay out the withdrawal.
At some point, Harry became annoyed by the behavior of some members. He expressed this in the newsletter to all members and created the impression that he would punish not only the "miscreants" but all the members. This may have turned some members against Harry. The mistake seems to have been that, instead of changing the WNH rules, Harry blamed the members for behavior that occurred as a result of the rules of the game.
Later, Harry closed WNH to new members. I believe this was a disastrous mistake at the time. It would have been far better to keep WNH open to new members, but with a much higher "entry fee" -- maybe $5,000 or $10,000. Once the businesses WNH had invested in had matured to the point that they were generating sufficient cash flow to meet all expenses and obligations, closure to new members could have been considered.
One of Kiyosaki's basic money skills is realizing the difference between an asset and a liability. In "standard accounting," if you buy a house, you consider it an asset. However, from a cash-flow perspective, if you have to make mortgage and property tax payments, while the house produces no income (i.e., it causes a negative cash flow), the house is a liability. From a cash-flow perspective, anything that produces income is an asset; anything that incurs expenses is a liability. See also Basic Money Skill #36.
Although Harry is an astute businessman in many respects, from the available information it seems that he actually followed a disastrous strategy of investing mostly in liabilities -- startup companies that required continuing influxes of cash to keep going. So, when Harry said that WNH had $40,000,000 in assets, this was probably true from a "standard accounting" perspective. But, from a cash-flow perspective, most of the "assets" were probably liabilities. I suspect that this failure to appreciate the difference between assets and liabilities may have cost WNH at least $20 million!
This was probably Harry's biggest mistake. Given that WNH had taken contributions from members on the basis of effectively paying out 4.5% per month, he needed ways to reliably earn more than 4.5% per month on the capital in his hands. Initially, his businesses probably satisfied this requirement, but at some point he ran out of businesses to invest in that provided the required return.
From the available information it seems that after the initial period Harry started investing mostly in speculative startup companies. When WNH was closed to new members, withdrawals probably started exceeding new money coming in. (Existing members were allowed to put in additional funds.) Although there were some companies with positive cash flow, the combination of withdrawals exceeding incoming money and the expenses of startup companies created a cash-flow crisis which probably continued at least to the end of 1999. For WNH to survive, as much cash as possible had to be extracted from the companies that had positive cash flow. This probably curtailed their growth to an extreme degree.
About 90% of new businesses fail within a year. And about 90% of those that survive the first year fail during the ensuing four years. The main reason for this is most likely that most people, including most business owners and managers, lack certain basic money skills. This means that the overall success of WNH was (and probably still is) to a considerable extent dependent on people who lack important money skills. See Basic Money Skills.
One of the lessons I've learned is that once you collect money from people, incurring obligations to them, from a cash-flow perspective they become liabilities. So, if you build a "customer base" of 10,000 in this manner, you've created an expensive liability. And if you have difficulties meeting obligations to them, then some of the customers turn against you and become much greater liabilities than the original obligations to them.
A more powerful approach is to build a "customer base" of people from whom you don't collect money directly. Alternatively, you could sell them some product or service which you can easily deliver. But the most powerful strategy is to build a "customer base" without collecting money from them. You don't incur obligations to your customers -- they are assets rather than liabilities.
Provided you can find some reliably profitable programs (not an easy task), you can promote these programs to them, resulting in both you and them making money. Harry may still have enough loyal customers to make such a strategy a viable option for alleviating his cash-flow difficulties -- even if it does not involve any of the specific programs I promote.
Following are two posts from the Ages Forum (see Harry Plott Saga - Part III):
I saw it like this: Harry had set up a true "sovereign, free enterprise" business structure (WNH). He studied all the legal ramifications, he had the best legal counsel; it was done properly, in accordance with our rights under the Constitution.
It didn't take long for attacks by State Attorney' Generals to begin, and attacks by other alphabet agencies. Much of this was due to the very unwise kinds of promotions done by MLM amateurs, who did not have a clue as to the kind of trouble they were causing for themselves and Harry.
Harry was able to fend off all these attacks time and time again, and there were lots of them. He knew his rights, he had competent attorneys assisting him; and he believed he could prevail. He did; but the "handwriting on the wall" began to appear.
Ultimately, in various ways, it came down to the brass tacks fact that certain powers that be, will actually at times do things that are illegal (unconstitutional), and they get away with it. Against that -- being right doesn't count, no matter what. I think this was Harry's rude awakening. He fought back and held his own where probably no one else could have; but knew that he must make major changes in the legal ownership structure of the assets under his guardianship; and conform in many ways with "the system" in order to preserve those assets.
So Harry began making those changes, and explained them to us quite clearly; that's when a majority of Capital Unit Holders showed themselves incapable (or unwilling) to see what was going on, even though it was explained; and the majority started saying "Give me all my f---ing money right now". And many caused more legal troubles because meeting the demands of the majority all at once in cash, was a physical impossibility.
This is kind of what I saw from my perspective. It will be interesting to see if Harry presents part of the picture differently.
Harry Plott responded to a question from "Joe" as follows:
That's a fair question but lengthy to relate. I will have to more or less depend on my memory of events. Maybe I should rephrase this to "what I believed could be true that wasn't". I'll categorize.
I believed that an individual could be free to operate a private business without being granted license or privilege; that none was needed. This may be true, but only if you confine yourself to staying small and out of sight of the authorities and the rest of the business world. My experience with legal, banking & government "authorities" is that you cannot function or interrelate with other businesses or business people without the proper "form and forms", i.e.: licenses, permits, all the state and local "trappings".
These "requirements" are not just forced upon you by the bureaucrats, they are forced upon you by everyone. It wasn't until much later in my experiences that I learned how ridiculous my ideas and ideals were perceived by many of the other business people I'd dealt with. Not all, but too damn many.
On at least three occasions, with our investment made, the other parties refused to honor their contracts and instead, informed me that their attorney advised them that I had raised the funds illegally and they did not need to honor those contracts. Two of them went so far as to file complaints against me and turn over "evidence?"!
All anyone had to do was run background checks on WNH or me to come up with the fact that I was "under investigation". Throughout the years of the trust operation, complaints did not come from within the group, they were instigated by outsiders.
Now many of you perceive me to be inept or incompetent. Think what you like, but there was no way WNH or I personally were going to be left alone to attempt to succeed in today's regulated world.
I believed that with the right people and ideas, and the money to implement them, value could be produced. I mean that substantial value could be produced. I tried to be a realist and an optimist at the same time. I knew new business ventures usually took more time and money then most people predicted. But I wasn't even close to being prepared for the agonizing truth.
An example: We had a contract with Southern Pacific Railroad (SPR) to monitor rail cars by cellular RF. That endeavor was scheduled to take 4-6 months. Halfway through the proof of concept, Union Pacific bought SPR. It was another 2 years before they even looked at our project again. We are just starting phase two of that contract a full 2 years later. The good news is that it is now our satellite systems with a much better long-term income potential then before.
I don't have room to even begin to compile all of the delays, postponed and cancelled projects we suffered through!
I believed that we could produce value faster than the amount we were accumulating in obligations. For a while, we were successfully keeping up with the increase. With what we had invested by late 97, I anticipated that in 5 years we would catch and exceed all of the accumulated obligations. We never got that far.
After 7 state orders against us, several "open investigation" and the US Securities people starting to bear down on me, we were forced to stop growing the membership and the incoming funds. The companies were still not ready to begin meeting the trust obligations. Not only that, but they still needed financial support.
Then began the blood letting. Project after project began to fail. Something that now seems to have been a pipe dream, namely Casey Aerospace, was within a million dollar plane lease from being in business for real. People may snicker now about Casey but it wasn't as far from pulling off it's venture then you may think. But we were turned down several times from getting a letter of credit because the Trust assets were looked upon as "tainted or suspect". Even today, the only way I can even get anyone to talk to me about refinancing our house (it's in trust) is to have S...buy it. By the way, she's using her MS bonds as the down payment. Well, she is buying it from me!
Should I have anticipated these problems? Yes, because they were my worst fears. I thought about these things all the time. Almost from the start, we were being confronted by obstacles. Believing that I could prevail against these odds was foolish and foolhardy. But soon we were long past the point of no return. When you are being pushed into a corner, your options become very limited.
I believed that people would see in our efforts a purpose beyond today's simple gratification. That was arrogant, foolish and probably unfair of me to impose my values and expectations on people who had no real idea of what they were getting into. That things turned out this way, at least to this point, was not only predictable but I was warned not to do this right from the start. I was warned by attorneys, the SEC, several Attorney Generals, and I don't know how many others, but I went ahead anyway.
So, Joe, this is why I say WNH was doomed from the start. It was based on my perception of the world and the mistaken belief that I could beat the odds. Now it is up to the people that run the companies that we've invested in to finish the job. It is up to us to give them the support and additional time needed to make this happen. Ever the optimist, I still believe that we can accomplish some of the things we started out to do. I still believe the value we need to see this through is in place. It just needs to be finished.
Sorry for being so long here but I've really only scratched the surface.
Two further WNH mistakes are worthy of note:
First, on more than one occasion, Harry included "accusatory stuff" in his newsletter to members, creating the impression that all members might be punished (for example, by closing down WNH) because some members did harmful things such as public advertising. Almost certainly, some members were alarmed ("spooked") by Harry's newsletter content to the extent that they decided to withdraw their money. This almost certainly contributed to cash-flow problems.
Secondly, Harry almost certainly had unreal expectations regarding the potential for success of the businesses he invested in. Typically, about 90% of new businesses fail during their first year. I have a suspicion that his projections (whether formal or informal) for the future of WNH were based on the expectation that most of the businesses he invested in would succeed. (If you have to pay out 4.5% per month on your capital, and you assume that 50% of the businesses you invest in will fail, then you have to invest in businesses that return 9% per month for overall success. I doubt that Harry took this factor into consideration.) See also: The "Unreality Imperative".
I welcome any further responses from Harry to any of the above, which I'll gladly include here.
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