8 Irrefutable Laws of Investing Success
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1. Cash flow solves your problems.
People actually really don't get what investing is about. If you want to be truly wealthy, you want to have consistent cash flow. Because consistent cash flow is the fuel for your life. Think about it. Why do you work? Why do people want a salary so badly? Because the salary to the worker represents consistent cash flow, it reduces their stress because they know there's more money coming in next month, and then next month and next month, and people will literally sacrifice their hopes and dreams for consistent cash flow. But investing people don't do this. They buy stocks, they buy bonds, they pay hardly any interest, but they don't truly invest in things that give them cash flow. If you have consistent cash flow coming in from your investments, it's going to solve all your problems. The greater your cash flow, the greater the life you can lead. Cash flow reduces stress.
2. Cash is king.
I tell my students that cash flow is not a consistent endeavor. It's an opportunistic endeavor. What does that mean? That means that you can't just go out and buy cash flow whenever you want. You can, but your rates of return are going to be really low. You want to be opportunistic, and wait for certain special opportunities, and when those opportunities come along, then you invest.
The ironic thing is that everybody's out trying to get consistent cash flow. But if they would just wait in one investment in the right environment, it can make up for years and years of investing in normal or sub optimal environments, and this is because you can buy at such a discount that your rate of return is really high, but in order to do this, you got to have cash on hand. Because the best investments are going to be made in cash, you're not going to be in a panic, you're not going to be able to go to somebody who's in a panic, to sell you an asset go, "Wait a second, I'm gonna go talk to my bank, and I'm gonna get a approval, and I'll be back in 60 days". That's not what they're looking for. They're looking for a bid right now. If you're able to be a cash bid, in times of stress and panic, you can buy virtually any price. So to be opportunistic, we need to have that cash on hand. When we have cash, we have bargaining power, we can negotiate. Because we can close immediately, and we can pay up front, and cash reduces the risk. There's no leverage in cash. If we buy something and it doesn't work, well, our loss is going to be manageable. Where if we go and buy a loan, with leverage, we can get wiped out. Cash is king.
3. We want to buy low at psychological extremes.
To be opportunistic with our investments, we need to have cash on hand, to have flexibility to make quick decisions. Buying at a low-cost basis, makes it much easier for your investments to work. Buying low, really, really helps. Also, the lower we buy, the higher our yield will be. Which then makes the value of the investment that much better, because it'll not only return a lot now, but it'll also return a higher rate of return or high yield for years ago, not just a year or a few months.
4. Volatility is your friend.
Everybody says "be wary of volatility. Be very careful and avoid volatility." I'm here to tell you it's the opposite. In periods of high volatility is where the psychological extremes occur that give you the chance to buy so low. Here's the thing, high volatility does not last long so when it comes along, you need to take advantage of it quickly. Because it will disappear just as fast. Some of your best investments, you might only have a couple weeks to a month to close before the bottom is playing. The other thing is, we need markets to move to be able to make money. This is one thing people don't think much about.
5. We got to limit our downside risk.
Always gotta play defense, defense, defense, even in times that are volatile. Especially when times are volatile. Because limiting our downside risk is going to keep us safe. Every investment should have intrinsic value. The intrinsic value of the investment limits our risk. We don't just buy something, this is key, we don't just buy something because it's cheap. Because a lot of cheap investments go to zero. We buy something that has high intrinsic value, but fear and panic have discounted it and pushed it under value. We're able to buy great assets cheap. The analogy I like to think about is it's like a beach ball in a swimming pool. If you take the beach ball, you push it underwater, the more you push it underwater is going to be forced, and when you let it go, the beach ball is going flying out the water. That's how we view buying assets to limit our downside risk.
6. You got to diversify risk.
Yes, we're gonna buy in a panic, yes, we're gonna buy low, but if we only buy one thing, that could go bad, could go bankrupt, could go to the fall. If we buy low enough, if we diversify, we can have investments that will actually go to zero and will still be fine. We diversify through multiple investments through multiple strategies, we don't want to just do one thing. We have a strategy we call the WAM Dividend Accelerator that's amazing that we teach. You can invest in fixed income or fixed income, closed and bond funds. You can invest in distressed real estate, multiple investments. In any one of these, if I did them, I wouldn't do just one, I would do multiple stocks in a dividend accelerator, I would do multiple closed and bond funds, I would buy multiple properties.
So multiple investments limit the loss of principal and limit the loss of income in any investment. This is going to happen. Companies are going to go broke, bonds are going to default and tenants are not going to pay rent. COVID should have been a big eye opener for a lot of you because one of the things we saw, I had a friend of mine told me this years ago and I kind of found it hard to believe but he was right on the money. He said if we get into a depression or some kind of major economic collapse, the government is going to all the tenants, they don't need to pay rent. Like seriously, he's like, yeah, that's what's gonna happen. They'll tell the tenant you don't need to pay rent. What happened in COVID? People just didn't pay the rent. So if you are a landlord and you're not getting rent, that can be really painful, especially if you have loans.
7. Options equal outperformance.
Okay, I'm a big options guy. Options are so awesome for limiting risk and creating outperformance and yet very few people use them. We want to use options where available because we could get significant outperformance in our investments. We can limit our loss to a known amount. We get efficient use of capital, we can change the payout profile where we can have limited downside and unlimited upside. We can increase our exposures to trade works, and we can put on strategies that make money when the market goes nowhere. All these things happen with options. Options are amazing for tailoring to your objectives.
8. Appreciation equals jet fuel.
What does this mean? We're going to invest based off of intrinsic value and yield. We want to buy low at the point of maximum pain in the market, maximum panic with high volatility. But here's the thing, economies are gonna go up and they're gonna go down, they're gonna go into recession and they're gonna go to expansion, they're gonna go into contraction and they're going to expansion. Cash flow makes the investment worth it on its own. You're buying it cheap enough that the cash flow alone makes it amazing, but if we get an economic cycle where we come out of recession into expansion, asset prices are going to start to increase in value. They're going to appreciate and when this happens, this is jet fuel on your portfolio and your portfolio will watch. This is really powerful, but this only happens if we buy low and we get our yield to make sure we're safe, and it's a great investment on yield only, and if the appreciation kicks in awesome. You don't need it, but we love it.
So these were the Eight Irrefutable Laws of Investing Success. This is very different than just what you'll see in any typical book. Take some time to process what I said, and ask yourself, how many of these eight laws are you doing in your own investing? And if not, why not? Could you open your mind to a different view to see if these could help you? I'm quite certain they will. Stay tuned next Tuesday for our next Trader Tip Tuesday, where we'll continue to show you tips and tricks like this today that'll help you take your performance to an elite level. Have a great week. See you next week. Bye.