One lesson that I must drive home at this point in this book is to never, under any circumstances, purchase any assets without first buying at least three good books to learn more about it. If you wish, you can take a class on it as well, but whatever you do, study, study, and then study some more. All assets can become liabilities if you don't know how to invest in them. For example, if you decide to buy a plot of land, do you know how to tell the difference between good land and bad land?
In general, most people consider land to be an asset, but it can become a liability if say, toxic materials are found on it. Do you know the basics of investing in gold and silver? Do you know where to buy it from and how to evaluate the seller to make sure they are legitimate? Do you know what type of gold and silver you should purchase? Do you know what type of gold and silver you should not purchase?
Each investment asset class has its own rules and terminology. If you want to invest in real estate, you had better learn the terminology that is used in this asset class, and you had better know how to tell the difference between a good piece of property and a bad property. If you're going to buy stocks, you have to know the difference between a good and bad company, and you should understand words such as PE ratio, intrinsic value, dividend yield, and related terms. Every asset class requires knowledge of that class in order to invest in it successfully. Investing in any asset class without understanding that class is akin to attempting to fly an airplane without knowing how.
Many people around the world who call themselves “investors” are not actually investors at all. They know very little about the assets they own, and much of their knowledge comes from some “guru” on television telling them what assets they should buy. My advice on this is simple: most of the financial information you get from mainstream TV shows, newspapers, websites, and magazines, is garbage. I often refer to it as being “the fast food of the investment world,” since like fast food, it is easily available, cheap in price, and usually of poor quality. In the world of investing, follow the crowd and you will get slaughtered every time.
The richest investors in the world are always those individuals who take the road less traveled. They buy what no one else is buying, and then sell once everyone starts buying it. They are usually at odds with what the mainstream investment community is saying, and regardless of how rich they may be, they rarely appear on TV offering advice for others to follow. These wise investors realize that what works for them may not work for everyone else, and they avoid giving piece meal investment advice. These type of investors are called “value investors.”
You may not know the definition of a value investor, but you may know the name of one of its most famous adherents: Warren Buffet. One of the richest men on the planet, Buffet has a net worth which supersedes the GDP that many countries produce in a single year. He has beaten the market many times, and he was able to do this simply because he never follows the market. Buffet focuses on finding “undervalued,” yet fundamentally strong companies that show promise of strong future growth. He buys shares in these companies at bargain basement prices, and only holds them until they become “overvalued,” at which point he sells.
Buffet will hold a stock forever, so long as it doesn't become overvalued. How do you know when a stock is overvalued? A stock, or any other asset class for that matter, becomes overvalued when everyone is buying it. Once you see information about it appearing in the news, and the buying frenzy starts, this means its time to sell, because your asset has now become a liability. No matter what asset you purchase, whether it is land, real estate, gold, silver, stocks, or bonds, you will want to make sure that you purchase it at less than its “intrinsic value,” meaning when you buy it, it should have a value which is much higher than its current price.
For example, if after studying a company, you find that it is fundamentally sound in every way, and yet, its current stock price of $13 a share is cheap compared to what it should be, say $60 a share, then you will then proceed to purchase a bunch of these shares at $13. At $13 per share, the stock is undervalued, but once it reaches $60 per share, it is overvalued and it is time to sell. There are some tools you can use to determine whether a stock is undervalued, but these are beyond the scope of this book.
However, at the end of this chapter, I will recommend a reading list of books you should purchase which are related to many of the seven asset classes discussed in this chapter. The knowledge provided in this chapter is not enough to get you started in the basics of investing, but it gives you a solid idea of why the rich are rich, and why the poor are poor, and what you must do to become rich.
The reason we recommend investing in a business or real estate first is because both these assets are the most likely to generate positive cash flow. Once you amass $100,000, you can't afford to invest in an asset that will take years to grow in value, since this is not a core part of your strategy yet. Your goal is to have your money begin working for you as soon as possible. In other words, using your $100,000 towards the purchase of an apartment complex that provides $3,500 per month is a much wiser strategy than say, purchasing a plot of land for $100,000, since one provides cash flow and the other doesn't. Below are a list of potential ways in which you can invest your $100,000 for positive cash flow:
- High ranked, established website that produces high monthly residual cash flow
- Convenience store
- Apartment Complex or other real estate
- Hair salon or day spa
- Restaurant franchise
- Car Wash
- Laundromat
- Vending Machine businesses
The eight investments listed above are good places to start. They all can produce positive cash flow per month, and by using a portion of your money in the form of a down payment, your money can then begin working for you. However, there are potential pitfalls involved with the purchase of any business, and this is why we recommend intense study in order to make sure you get a return on your investment. The last thing you want is to spend years amassing your savings, only to lose it to a scam. By knowing how to evaluate a business, you won't go wrong, and your first investment will be the right one.
Because of the amounts of money involved with the purchase of a business, we recommend having a contract signed with the owner who is selling the business, which ensures that you are protected in case something goes wrong. Buying a business or piece of real estate is not as simple as handing someone the money and then sitting back and letting the cash role in. A great deal of research must be conducted on the business in question in order to make sure the deal is legit.
As far as real estate is concerned, you could easily pass through 100 bad properties before finding a single good one. If you're buying a business, hiring an accountant in order to look at the numbers may turn out to be a wise investment. With this first cash flow deal, you cannot afford to fail; the amount of money involved is too high. Remember, you've spent years acquiring the money which is needed to become an investor, and you cannot allow some crook or scam artist to walk away with your hard earned money. I cannot emphasize enough the importance of carefully evaluating the deal to make sure it is the best one.
Once you have the capital necessary to transition into an investor, there are few limits to the type of deals you can make. The eight ideas mentioned earlier are just a few of the business deals which you can close. The basic idea is that you will put a down payment on the business and real estate, and then use a portion of the cash flow which is earned from that investment in order to pay down the debt, while keeping the rest in your pocket.