I often find myself approached by people looking for advice on how to invest their assets and if they should invest in certain stocks, bonds, real estate, and more.

My recipe for building wealth is contrarian: for people under 50 with less than $3 million in assets, it is usually best to junk the stock portfolio and focus on investing in yourself.

In general, building your long-term assets is a two-step process:
1. Invest in yourself so that you can increase your revenues (or salary)
2. Watch your expenses

Investing in Yourself

“Go confidently in the direction of your dreams.  Live the life you have imagined.”
– Henry David Thoreau

Whether it’s taking out loans for medical school or buying your first unicycle (for the kid who has always dreamed of being a world-class unicyclist), an investment is the first step towards your dreams.

But investing in yourself doesn’t just mean following your dreams. It means making yourself better.  For example, if you’re a whitewater rafting guide, it could mean investing time and money to get certified by the Wilderness Medical Association.  Making yourself a little more qualified for your job could get you a 10% raise rather than a 3% raise and a higher base on which to get a raise next year.  On a $50k salary, that’s an instant difference of $3500 that compounds fast.

This is the same calculus that justifies going to Law or Business School, where students assume that a great deal of money invested and lost income opportunity in the short term will yield greater returns down the road.  You can make this same assumption on a smaller scale (and with a much higher potential for return).

Of course, you can always start a side-business.  Most people can earn more money by starting a money-making hobby (like selling cool scarves that you knit) than investing their money wisely.  That’s because percentage growth on small assets is still small.  Very few Americans can earn another $5000/year through investing but most can earn that through a side hobby.  

One thing you might want to do in the short-term is to buy time. One Rapleaf employee outsourced a small percentage of his job to a team in the Philippines for $3/hr.  That enabled him to be more efficient and concentrate more on his key goals.  While Rapleaf ended up picking up the tab on this, the investment in your time may be worthwhile even if your employer is not receptive to you becoming more efficient. 

Some dreams require nothing more than time and sweat, while others require tremendous sums of capital.  But all dreams require significant investment.  And that initial investment is paramount. 

Decreasing Your Expenses

With almost no time invested, most people could decrease their yearly expenses by $1500/year.  For example, the odds are pretty good that you’re paying more than is necessary on both your cell phone and your credit card bill.  Take the time to shop around, and prune services from your contract that you don’t ever use. Sites like RetailMeNot.com offer an abundance of online coupons for all sorts of E-tailers.

For most people, the biggest expense – and the biggest opportunity to save – is housing.  If you’re willing to do a little work around the house, many landlords are amenable to hefty rent-reductions in exchange for the occasional odd job.  By spending a Sunday afternoon helping your landlord build a shed or insulate an attic, you double the return on your time invested: not only is your rent reduced, but your living situation is improved.  And even if you’re not handy, you can often reduce your rent significantly by just asking for a reduction.  The worst thing your landlord can do is say no.

With a concentrated effort of 100 hours, most people could save over $5000 per year – and that is often recurring savings. While this may not be a worthwhile investment for people making over $150k per year, saving $5k per year for most people is a big deal.  If you have $100k in liquid assets, you’ve just increased your annual return by 5% for the year with zero risk.  That’s a pretty good investment.

And remember, saving money is also very tax efficient.  You don’t get taxed on what you save (only on what you earn).  

When Investing Elsewhere

If you have time after investing in yourself and decreasing your expenses, then invest your money wisely.  My suggestion is to start off investing conservatively (like a simple money market account or a bond fund) so you don’t lose anything first. If you are increasing your profits every year by increasing your revenues and decreasing your expenses – even if you earn 0% — you are coming out ahead.  Focus on getting the best return you can that is safe.

I personally would recommend only putting a small percentage of your portfolio in the stock market.  Even if you invest conservatively (like the Vanguard S&P 500 fund), you might be disappointed in the results.  Since I started investing actively in the market in 1999, stocks have basically been flat. The stock market game is rigged for people with sophisticated systems and proprietary information. 

Summation: when thinking of investing, first concentrate on growing your personal revenues and next on decreasing your expenses.

(Special thanks to Jake Kring and Michael Hsu for their help and edits)

I've noticed that people either count by fives or by tens — and the older you are the more likely you are to count by tens.

for instance, if you count by fives, that you think a 26-year-old is "25" … but if you count by tens then she is "30".   people will lump you into an age cohort group that might be fine (5 years) or large (ten years).  

As a CEO, one of your goals is to foster a unified company pursuing a common, large mission.  Especially if you are running a start-up, you need everyone working together to beat the big guys. 

One insidious killer of companies is politics.  It is common in all organizations (even tiny ones) and can be a slow killer of the company when it pits employees against each other.   Internal politics even killed France’s hopes at the World Cup.  Getting everyone on the same team will increase communication, output, and success. 

Be your own clique

Politics comes from cliques.  Cliques form from people with similar backgrounds, world-views, or missions.  Cliques are impossible to avoid because humans are tribal and they want to belong to a subgroup.  But you can work to eliminate cliques within your company by making the entire company one big clique. 

By creating your own clique –Googlers, Rapleafers, etc. – you unite everyone in your company together.  It is “us” against those other guys.  

One way to do this is creating corporate uniforms.  Uniforms unite people.  This is why so many companies give out schwag (T-shirts, hats, sweatshirts, etc.) to their employees.   If you can have a huge sign outside your office, do it.  

Internally, celebrate the distinct piece of your culture by displaying it everywhere.  If you are a photo-sharing company, you might want to decorate your walls with great photos your users took.  Siebel built a company around serving their customers – so they had pictures of their customers around their office.  Rapleaf focuses on celebrating our employees – so we have pictures of our employees everywhere.  

Some companies focus on having an enemy.  If you are Mozilla and you are working to create the world’s best browser, you might hate Microsoft.  You’ll need a good reason (“they are closed, we are open”) and a large and powerful enemy that will unite the company together to take on a hard challenge. 

Hire the non-political person

The best way to not introduce politics in your organization is to try not to hire political people in the first place.  That’s really hard to do but here are some ideas that you might want to incorporate into your hiring process.

One way you can eliminate cliques is by focusing on diversity.  People from similar backgrounds tend to form a clique and others will feel excluded just by the fact that they are not from that background.  If the first seven people at your company are all of the same race, you’ve got problems.  And if they are all from the same college, you might institute an unintended bias.  One other good rule is to try to recruit and hire female engineers.  Gender diversity is important to break down cliques and that’s something all tech companies (including my own) could do a better job at. 

Try not to hire people that dislike their former managers or employees.  Focus on people that generally talk well of others and see the positive in others.  Mean people tend to think of others as pawns – so look to hire considerate employees.

Do your due diligence on any exec you are hiring from a big company.  It is very hard to advance in a large company without being really good at office politics.  So be wary of hiring someone who has been very successful at a large organization as they might not understand that your company is different. 

Only hire A-players.  A-players are, by definition, doers, and they are more likely to hire A-Players themselves.  If you are not sure if someone is an A-Player, don’t take the chance.  Pass on them and focus on recruiting someone who is smart, nice, and gets things done.   Look for people that, by nature, share the credit and get their job satisfaction by doing, achieving, and solving hard problems. 

When you do hire people, make sure you clearly convey your corporate values to them.  One of my favorite corporate values at Rapleaf is that “Rapleafers do not value our own ideas more than those ideas generated by our teammates.”  I love that.  I was once at a meeting where one of our engineers was strongly advocating for a particular architecture and against another idea … and then I noticed that he was arguing against his OWN idea and did not even realize it.  It was awesome. 

Set the Example: Politics start at the top

It is important that you don’t play any politics.  That seems obvious but some of the CEOs who complain about politics in their organization practice things like pitting executives against each other and hoarding information.  

Water flows downhill and culture spreads much faster from the top.   Try to ensure that your top execs are really team players – and make sure their actions mirror their words.  

Create transparency and open communication

Great political players often win by hoarding information.  You can stop them by making the information flow at the company as open as possible. 

Tell your employees what is going on and make sure there is transparency throughout the organization.  This becomes more and more difficult as the company grows but it is extremely important to keep information moving quickly.  Do everything possible to stop information bottlenecks in the organization and try to create multiple redundancies.  

Promote based on merit

As a CEO, you’ll always want to ensure the very best people get promoted and get more responsibility and more recognition within the company.  While it is obvious who the best people are when the company is tiny, it becomes harder to know that as the company grows.  As CEO, your goal should be to meet with people at the lowest levels of the company and get their thoughts about the business, how they are doing, and who else they love working with. 

It is incredibly important that you promote the very best people. If only average people are being promoted, everyone else will assume it is for a political reason and the rational response will be for them to start playing politics to ensure their success in the organization.  Conversely, if you fire or discipline people that play politics, you will be sending the right message to everyone.

Summation: very few people actually want to work for an organization that has politics.  Most people (especially the doers that you want) abhor politics and will be drawn to an organization that focuses on developing great talent, solving hard problems, and getting things done.

(special thanks to Simi Chaudhry for her help and edits)