September 5, 2013
Dear FutureMoneyTrends.com Member,
Last week we asked a very important question, “are you an investor or a speculator?” From the responses we received, it seems that a lot of you are like me, a recovering speculator.
Today I want to cover where I believe 95% of your wealth should be at all times in your life.
The #1 rule to investing is to not lose money according to Warren Buffet, the #2 rule is to never forget rule #1. I apply the rule of not losing money to exactly that, owning assets that I have very little chance of losing my money on. Remember, the rule isn’t, never have a down day, or never own an investment that falls in value, the rule is to never lose money.
Not losing what you have made and invested is one of the most important rules you can live by and a sure way to build your wealth over the long term.
Now I have stated very clearly in the past that it is highly unlikely you will ever get rich from your investments in the short term, this idea of buying some unknown tech stock or mining company with a hidden gold deposit is the same strategy average folks use when buying a lottery ticket. Most of your money will be lost, in fact it is very likely you won’t be able to stomach it. I have a friend who bought 10 micro-cap companies using the logic that 9 will crash and 1 will make him an instant millionaire, instead all 10 went down over 70%, some went to nothing, and he ended up just selling all of them since he had already lost so much. The best way to get rich is to start your own business, so please try and separate your efforts between building a long term wealth strategy (investments) and operating a business that helps people.
Don’t Lose Money
No one cares about your money more than you do, you are your money’s first and last line of defense!
Owning assets that you won’t lose money on is easy, here are some rules that I try and live by.
- Buy at the right price
- Buy the right investment
- Only own cash flowing investments
Buy at the Right Price
I recommend everyone read the book Intelligent Investor by Benjamin Graham. Whether you want to own stocks, real estate, notes, or silver, you want to understand the fundamentals of all of your investments and have the ability to assign a value to them. This way you can take a step back from the market price and truly ask yourself, is this undervalued.
Buying undervalued investments doesn’t mean it will imminently go up in value, however, it gives you a margin of safety so that you won’t lose money. Remember, buying a great company like Apple (AAPL) that is listed publicly means that it will go up and down in price every day the market is open, so you need to know the real value of AAPL so that you can know whether or not the market is over pricing or under pricing it.
Buy the Right Investment
This is a big one since most people will buy speculative bets, not real investments. You should qualify an investment like Benjamin Graham, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”
When I think of investments, I think of safe businesses with proven and reliable track records. Some of my favorites are companies like Becton Dickinson (BDX) who controls 70% of the syringe market, and The York Water Company (YORW) who has been paying a dividend since 1816!!! That’s right, you think I am worried about losing money on a company that has paid out a dividend for 197 straight years, paid shareholders during the American Civil War, WWI, WWII, and the current financial crisis… not a chance. Is York Water a large cap? No, they have a market cap of $250 million, but they have an absolute proven and reliable business that I have no doubt will be around for the next century.
Buy safe and reliable investments with a proven track record, basically buy great companies at the right price. Both BDX and YORW can see their share prices go down, but these are two great businesses that are not going away. One of them is a buy right now and one of them is not, to see which one, sign up for our Smart Money Membership for free today and look for our next Forever Stock Suggestion report on September 15th.
Only Own Cash Flowing Investments
This one is easy, if you are buying in hopes that something will go up, you are speculating. Invest in cash flowing assets, ones that pay you monthly, quarterly, or annually. I don’t care if it is dividends, rental income, interest from a note, bond, or options strategy, you want to focus on cash flow.
I can promise you this, if you make it a point to focus your efforts on cash flow, you will be independently wealthy one day. I think of it as buying income. When I spend my money on a property, I don’t want to speculate, I want to own more income, I want bills to be covered by passive income. I have never seen anything that produces cash flow not see capital appreciation, so consider capital appreciation to be the icing on the cake. This will also help you mentally when things are down in value or the market mis-prices something.
I purchased a Duplex for $116,000 in 2005, it rose to over $200,000, and then crashed in value to under $80,000 in 2009. Not once did I ever care about the value, in fact the only reason I know of the market price is because I wanted to buy another one. The market price was irrelevant to me, the property produced cash flow, enough to pay my bills (basic utilities). Focusing on cash flow will give you peace of mind during market panics, and most importantly it will give you extra income.
What I would like to do is open up this discussion about speculating and investing to real scenarios you may have. If you have a questions, comment, objection, or an investment scenario you would like us to review, please reply to this email and share your thoughts with us. We will answer every message and try and include a few in next week’s weekly wealth digest.
***Share Disclosure*** I am long BDX, AAPL, and YORW.