The 4 Rules of Every Investment
The 4 Rules of Every Investment
Robert Kiyosaki, author of the world’s No. 1 best-selling personal finance book, has been on a roll lately…
Since we spoke during my Money Revealed docuseries, Robert has been sending me a lot of important information on how to make my money work for me instead of the other way around.
I’ve found this content very valuable and you deserve to have it for yourself.
Today, Robert reviews the four rules of successful investments and how to create an entrepreneurial mindset.
Let’s get right into it…
Dr. Patrick Gentempo
The 4 Rules of Every Investment
One night, my wife, Kim, and I had dinner with a very popular personal money management proponent. He looked at us and asked, “Do you know what the difference is between the two of you and the rest of us teaching personal finance?”
Not sure of what he was getting at, we shook our heads no.
He said, “You two look at everything through the eyes of an entrepreneur, including your investments. You look at everything as a business.”
On the drive home Kim and I talked about Dave’s comment. He was right. We view everything we do through the lens of entrepreneurship.
What exactly does that mean?
In the world of investing, it means that every investment is a business. It has its own income statement and balance sheet, must have sales and marketing driving it, must be profitable to survive, must have a team behind it and must have a purpose for existing. These are the fundamentals of a successful business, and they are also the fundamentals of a successful investment.
Maybe at this point some of you are saying, “Yeah, but I’m just buying a few shares of stock. I don’t need all those things.”
Perfect example. What does every stock represent? A stock is a share of company. Does a company need sales and marketing, accurate financial statements, a strong management team, a purpose or mission and a good revenue stream to succeed throughout the years?
Of course it does!
Yet how many people do their homework and research the fundamentals of the company they are investing in before buying a share of stock in that company? Very few. But I can tell you that Warren Buffett does.
A great quote from Warren Buffett goes: “I am a better investor because I am a businessman and a better businessman because I am an investor.”
The Four Rules of Every Investment
I have been an entrepreneur since I was 9 years old when my friend Mike and I started our first business renting comic books. At the age of 9, it wasn’t a “do or die” situation, but there was a lot of learning that took place.
Through the eyes of an entrepreneur, here are the investment rules I live by:
1. The Investment Must Put Money in My Pocket
First, I look for cash flow. Second, I look for appreciation. Remember, a good investor is in the business of building their asset column. Any investment that doesn’t put money in your pocket isn’t an asset. It’s a liability.
2. The Investment Must Stand Alone
An investment cannot survive off the cash flow or funding of another investment. In the world of business, you cannot use the wealth of one business to keep a subsidiary business alive. Each business must be profitable in and of itself. The same is true for investing.
3. I Want to Control the Investment Whenever Possible
In real estate and my businesses, I control the income, expenses and debt. What do I mean by control? Let me illustrate using the example of driving a car. To be a safe driver, there are six basic controls we all must have:
- Steering wheel
- Gas pedal
- Gear shift
- Driver’s education/license
You wouldn’t drive a car if you didn’t have any one of the above controls. Yet when it comes to investing, this is what most people do — they invest without having any influence over the six basic controls of investing or a business:
- Asset value
- Financial education/management
The reason Warren Buffett says he’s a better investor is because he’s a businessman who has control of those six levers of a business.
In other words, he can tell how good an investment is by how well management manipulates these basic controls. In most of his investments, Buffett doesn’t just buy an equity position; he does his best to buy control.
With investments such as privately held businesses and commodities where I don’t control these things, I do my best to actively monitor and stay on top of what is happening. Never stop looking at ways to improve the investment and increase its value or the value it returns to you.
4. Every Investment Must Have an Exit Strategy or Exit Options
The rule is: Know when you will sell before you buy.
This may be based on price, date, certain market events or personal events.
For example, Kim and I tend to hold onto our real estate investments and not sell. Yet we know what it would take to sell. In 2006 when the real estate market was at its peak, we were offered an extremely high price for one of our apartment buildings that was operating at maximum cash flow.
We sold that property and moved the profit into a larger apartment building that gave us a much higher return on investment. In 2018, we were in the same “selling” mode.
Moving Beyond Average
At the end of the day, Kim and I have become very successful as investors precisely because we view each investment as a business. Most average investors don’t do this, and as a result, they have average results.
Unlike employees, entrepreneurs don’t rely on the “safety net” of a paycheck from someone else. They learn from their mistakes, are driven to solve problems, face challenges with new answers and get results no matter how much time or effort it takes.
Creating your entrepreneurial mindset will help you change the way you look at life and investing. It takes a certain amount of financial education and IQ to look at investments this way, but in the long run it’s extremely important to have and build this mindset.
I encourage you to start growing your financial knowledge today and begin learning the ins and outs of viewing everything as a business.
It doesn’t matter where you are now in life. What matters is the mindset you bring to your investments. Think like an entrepreneur. Your investments are a business, and you need to treat them like that in order to reach your financial goals.