Interview with James Berman: There are Ten Lemonade Laws

James Berman is the president and founder of LLC, an SEC-registered investment advisory firm specializing in asset management for high-net-worth individuals and trusts. With over 16 years of experience managing client portfolios, Mr. Berman is a specialist in value investing and asset allocation. As the president of JBGlobal LLC, the general partner of the JBGlobal Fund LP, Mr. Berman manages a global equities fund that invests in the United States, Europe, and Asia.

Mr. Berman is a faculty member in the Finance Department of NYU (SCPS Division), where he teaches corporate finance. He also serves as subadvisor to Eitan Ventures LLC, a venture capital fund based in New York.

Mr. Berman has appeared on CNBC, the Fox News Channel, the Cavuto Show, and the Fox Business Channel and is frequently published and quoted in a variety of publications, including the Wall Street Journal, Barrons, Fortune, Bloomberg, and CNN Money. As a regular blogger for the Huffington Post, he covers financial topics ranging from hedge funds to the economy. He writes a monthly interactive investment letter, the Berman Value Folio, a Forbes/Trefis publication.

Mr. Berman received a BA (magna cum laude, Phi Beta Kappa) from Harvard University and a JD from Harvard Law School.



Q: Thank you for this interview, James. Can you tell us what your latest book, Lessons from the Lemonade Stand, is all about?

A: Written for aspiring investors of all ages,Lessons from the Lemonade Stand explains everything you need to know in the context of that most classic of all American businesses: the corner lemonade stand.

Rooted in the fundamental truth that “common sense is the best investment tool,” the book slices important concepts into simple sections, sweetening them with folksy, easy-to-read language. The trials and tribulations of lemonade stand owner Lucinda highlight every concept from interest rates to retirement accounts to leverage. Learn investment basics as you follow Lucinda Lemonade Inc. along its sweet (and sometimes sour) journey as a start-up, from the squeeze of the first lemon to its initial private equity deal and its eventual foray into tech, all in the tidy town of Lemonville.

Q: What kind of research did you do before and during the writing of your book?

A: Because my book involved the simplification of material I deal with every day, I didn’t have to do much research. In fact, the bulk of my research concerned navigating my journey into the world of self-publishing.

Q: If a reader can come away from reading your book with one valuable message, what would that be?

A: The Lemonade Laws, of which there are ten:

  • Every topic in the investment world can be broken down to the basic concept of supply and demand.
  • If someone claims an investment is risk-free, run the other way.
  • Bigger returns mean bigger risks.
  • Hedging may help, but there’s always a cost to it.
  • As Warren Buffett says, “If you’re smart, you don’t need leverage; if you’re dumb, it’ll ruin you.”
  • You may not be able to count on your stocks, but you can always count on your taxes.
  • By the time you invest in a foreign country, it shouldn’t be foreign to you.
  • Owning a home is (still) the best investment of all.
  • Investing without work is gambling: treat the market like roulette, and you’ll land on zero.
  • Counterintuition, not intuition, is the investor’s best friend.

Q: Can you give us a short excerpt?


Investment is a common sense topic – not quite as common as tying your shoes or brushing your teeth. Yet we learned about it soon after we mastered those feats: when we opened our first lemonade stand.

 If you were a young entrepreneur, you probably had a lemonade stand or maybe a bake sale or whatnot. I had my first business with my friend Justin: we sold lemonade, iced tea, and homemade peanut butter in front of my apartment building. You get the idea.

The investment world sounds complicated, but it can all be broken down to basic concepts. The most important is supply and demand, a fancy phrase for selling and buying — which is just another way to describe what goes on at lemonade stands across America on any summer day.

This leads to Lemonade Law #1:

Every topic in the investment world can be broken down to the basic concept of supply and demand.

Don’t feel bad if you never had a lemonade stand. I’ve only chosen the lemonade stand for its common touch. But the idea is flexible, and you can plug in any other business. This book grew out of a perceived need — a need to explain investment topics in simple ways. There’s too much confusion surrounding investing. The talking heads toss around phrases like “credit spreads” and “equity dilution” — and out goes the viewer’s attention. Here, investment terms are introduced in bolded italics so that you can separate the lingo from the plain talk.

In the true spirit of a primer, this book is introductory. It’s neither comprehensive, nor does it offer legal or accounting advice. It barely scratches the surface of most concepts but hopefully provides the tools to understand any concept. If it does what’s intended, it will allow you to apply lemonade logic to your money. Buyer beware: This book is unlikely to make you rich in and of itself. If all else fails, you could go back to running a lemonade stand. You’d certainly have the best on your block!


Apples and Oranges: Stocks and Bonds

“Investing is fun, exciting and dangerous if you don’t do any work.”

–          Peter Lynch

Meet Lucinda, who has just launched Lucinda Lemonade Inc. in the quaint, tidy town of Lemonville.

To open a lemonade stand requires capital — that is, money. Maybe a buck or two here buys the lemons, and one or two there buys the sugar. There’s also a dip into the piggy bank for pitchers, along with crayons and paper for a sign. Rent is not a problem for most lemonade stand owners. The start-up capital – the money required to get going – is minimal.


Let’s assume for the moment that Lucinda’s lemonade stand is doing a brisk business, and she wants to expand her operation, perhaps by setting up a second stand on Main Street. She runs into a small problem in her exciting expansion: she needs more money.


Lucinda considers going to a bank for a loan but worries they would never lend money to her tiny business. She has the idea of raising money from a few friends by selling pieces of this profitable and growing business. If Lucinda decides to sell a piece of the lemonade business, she’s selling stock ¾ or if you want to be particularly highbrow about it, equity. If she divides the business into tenths and sells one-tenth of the business to her neighbor Liam, she’s sold one share of stock.

The process goes something like this: Lucinda sells a piece of the business ¾ that is one share of stock ¾ for $10. Two things are now different. One is that Lucinda’s business has $10 in the piggy bank that it didn’t have before (enough to buy new signs and a table and pay her new assistant). The other is that Liam now owns a piece of the company. That means that he’s entitled to one-tenth of the value of Lucinda’s business going forward, whether that value goes up or down.

Keep in mind that Liam and Lucinda’s deal is a private one. In other words, the share in Lucinda Lemonade was not traded on a stock exchange; instead, Liam and Lucinda negotiated privately since Lucinda Lemonade is still a private (not publicly traded) company. This is known as a private equity deal.

Now let’s turn to Liam, who is Lucinda’s first passive investor. Liam is an investor because he’s risked some money for a slice of the action, and he’s passive because he doesn’t take any day-to-day role in running the business. The closest he comes to being involved with the business is stopping by for a free cup of lemonade; he often feels entitled to do this as a shareholder, someone who owns a share of stock in a company. He has traded $10 for a tenth of the business, which effectively values the business at $100. In fact, we can say the lemonade stand business has ten shares outstanding and a valuation of $100:



There’s no guarantee Liam will get his $10 back. There’s no guarantee he will ever make money on his investment. He might even lose it all.

So why does our investor invest? Because he feels that he will make money ¾ that is, get a return on his investment. A share of a business that does well can become valuable. If Liam owns a share in a successful business, he can do well for himself.

So how will he get this return? Let’s assume that the second lemonade stand really takes off. At some point, $10 will start to look like a small price to pay to own one-tenth of a business that is selling buckets of lemonade. Liam’s neighbor Ella gets wind of their success. She thinks that one-tenth of this dynamic business is worth more than $10. She offers to give Lucinda $11 in exchange for an additional share. Lucinda balks at the offer. After all, she doesn’t need any additional funds at the moment, and she doesn’t feel like selling an additional piece of this growing venture. Every share she sells leaves less for herself. So Ella approaches Liam one day as he sits and tests the product on the stoop of his house. She asks if he would like to sell his share in the lemonade venture to her for $12. Liam thinks about it for a minute, decides he’s sort of sick of the lemonade thing anyway (having already had more lemonade than any person logically should in a lifetime) and realizes that if he sells his share for $12 to Ella, he’s made a quick 20% return on investment (ROI) in the form of a capital gain, an increase in the value of his share:

LIAM’S PAYMENT FROM ELLA             $12.00 –



            LIAM’S ORIGINAL INVESTMENT          $10.00 =

LIAM’S PERCENTAGE GAIN                         20%


Or said differently:

$12.00 minus $10.00 equals $2.00 divided by $10.00 equals 20%


He takes Ella up on her offer: he gives her the stock certificate he had gotten from Lucinda showing ownership of one share of “Lucinda Lemonade Inc.” In exchange, he gets $12 from Ella and spends it (taxes complicate things, but we’ll get to that later).


Lucinda still needs more cash. She’d love to buy two new manual lemon squeezers to boost her lemonade production. Unwilling to give away additional equity, she decides to borrow money ¾ not from a bank, but from some of the townspeople of Lemonville. Lucinda realizes that by borrowing money from a neighbor, she avoids giving up any ownership in the business. Instead, she is just borrowing some money that she promises to return later. She is thereby issuing a bond, a promise to pay back money borrowed. The disadvantage is that she has to pay back both the interest and principal to the bondholder.

Along comes George, who feels that he would love to lend some money to Lucinda Lemonade Inc. After all, Lucinda offers 5% interest, a decent return with bank saving accounts paying only 1%. George knows that Lucinda is paying four additional percentage points because she’s not as safe, or credit-worthy, as the corner bank. He may lose his investment if Lucinda doesn’t repay her debt. But he likes the idea of getting more interest in exchange for that risk, a risk premium, and he thinks Lucinda Lemonade Inc. is good for the money. George signs a contract with Lucinda, saying that he will lend her $50.00 in exchange for the right to receive $2.50 a year (his interest), and he will get back his initial $50.00 loan, or principal, in five years. George has therefore purchased a bond with a 5% coupon (contractual interest rate) and a term of five years.

Q: In your own experience, is it hard to get a nonfiction book published today? How did you do it?

A: The single best tool available to writers today is the ability to self-publish.

Q: What’s a typical day like for you?

A: A typical day is devoted to my work as a private investment adviser. I also teach corporate finance at New York University.

Q: What’s next for you?

A: Next is the publication of the sequel to my book– More Lessons from the Lemonade Stand: A Common Sense Primer on Stock Picking.

Q: Thank you so much for this interview, James. We wish you much success!

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