M.C.: This is Cashflow Ninja Episode 12, another Wisdom Wednesday.
Announcer: Welcome to the Cashflow Ninja, the podcast empowering and inspiring people to discover how to generate their own income and manage, grow, and protect their own wealth in the new economy. Now, here is your host, M.C. Laubscher.
M.C.: Hey, guys. M.C. Laubscher here. Welcome to another Wisdom Wednesday. I've a very interesting topic to discuss today, things to consider before investing in anything. Before we jump in to our topic, for our new listeners, I launched giveaway still live. You can enter our giveaway at cashflowninja.com/giveaway and you can also join our community and mailing list by texting the word CASHFLOWNINJA, one word, all capitalized, to 44222, that's two fours and three twos. Community members on our mailing list get weekly show sent directly to their inbox along with other valuable resources and information. If there's any way that I can add more value to you and anything that you would like to talk about or learn about, please e-mail me at firstname.lastname@example.org or go to our contact page at cashflowninja.com/contact and send me a message. You can also leave a voicemail on our contact page through our SpeakPad voicemail line. Before we jump in to the show I just want to thank our sponsor Audible. Download any audio book for free when you try Audible for 30 days. Grab your free trial and audio book download at cashflowninja.com/freebookdownload. Here's today's question.
Kimberly: Hi, M.C. Kimberly here from New York City. Love Cashflow Ninja podcast. Can you talk on one of your Wisdom Wednesday shows about what factors to consider before we invest in something? Thanks.
M.C.: That's a difficult question to answer with just a blanket answer. Everyone has different goals and dreams. We all have a different personalities, principles, values, skill sets, special gifts, and talents. The first thing that I would say is before we invest in anything, we should invest our own time in educating ourselves. So let's say first investing in your financial education before you invest in anything. We shouldn't invest anything that we do not understand. There is a cliche but it's so true, the biggest risk is not the investment but the investor.
There's many people that fail at real estate investing and there's people that succeed. There's many people that succeed in building businesses and online businesses, and there's many people that fail. The same with gold and silver, the same with stock trading and options trading, and other paper assets. In the same breath I would also say you should know what the difference is between an asset and a liability. I'm a big fan of Robert Kiyosaki and he really goes into this and has identified one of the biggest reasons that people stay poor, and little cause is they don't know the difference between an asset and a liability. I will do an entire show to talk about the difference between an asset and a liability. We will look at real estate, commodities, businesses, and paper assets.
One of the things that I will discuss, too, in-depth because this is a very, very controversial topic, but I feel that needs to be addressed is is your house an asset? The difference between an asset and a liability is, an asset puts money in your pocket every month and year, and a liability takes money out of your pocket every month and every year. That's the criteria that we should look at all these vehicles at. Now there's a couple of factors that I would look at from a philosophical standpoint, the factors that I would take a look at before I invest in anything is, “Is the investment aligned with your principles and values?” This is a very, very big one. For instance, if you are very much against GMO food, would you buy Monsanto stock? Most people would look at me and say, “Hello, duh, M.C., no. Obviously I will not buy Monsanto stock.”
Well, what's in your 401k? Do you know all the mutual funds that your 401k invested in and do you know all of the stocks that are in these mutual funds? That's really important. So every dollar that we have in our hand, we are voting with. Whether you know it or not, everything that you spend money on, you're voting with your dollars. So it's very important to know where your money is and if it's aligned with your values and your principles. The second philosophical factor is, “How is your investment providing value for others? Is it providing value for others?” This is very important and it's aligned with the third one, “How many people is it providing value for? Is this the benefit of you or you're providing value to the community, society and all? It's very important to know whether this investment is providing value for others and how many people is this providing value for.
On the fourth factor, “Is this investment aligned with your strengths, your skill set, and your human life value?” Again, back to the cliche we don't invest in anything that we don't understand. So if it's aligned with you strengths, your skill set, your human life value, which is your knowledge and your special gifts, then you have a better opportunity to succeed. Warren Buffet once asked about why he didn't invest in Facebook and all these companies, and he said, “Well, I don't know anything about internet companies or their business,” so that's why he didn't invest in that. And then the last factor is, “Are you providing time, knowledge, money or credit to the investment?”
If it's really investment your providing one of those for, otherwise it's just a gamble and a moonshot because you're trying to get something for nothing. That's a very, very important question. So, are you providing time, knowledge, money or credit? A couple of other more practical things to consider before you invest in anything, this is what I've learned from other investors that I've made a checklist to use it on my own life. The first one would be the return of capital and the safety of your money. Is your money being returned to you or how quickly you can get it back? I know in some of real estates projects, a lot of investors want their money back within three years.
So the big thing is, can you get your money back and how quickly are you going to get your money back? The second thing is liquidity, how liquid is the investment. Real estate, for example, if you're buying a property, is not very liquid. You can't sell it right away. Stocks is a little bit more liquid. There are certain investments that's liquid and not liquid. The third thing is, “Is the investment economic efficient?” Now what does economic efficient mean? Is it efficient as far as tax strategies? Is it efficient as far as eliminating or reducing fees? There are many different criteria that you can take a look at if it's efficient as possible. The fourth one is, “Do you have control over the investment?” So if you're investing on a stock on the stock market, how much control do you have over that stock going up or down? Do you have more control over a property that you buy? You can make improvements to the property, you can raise the rents, you can screen tenants, you can add things on.
There's different creative strategies to raise the rent and increase the investment. Now, I'm not saying this is a real estate versus a stock market. It's just an example. If you're on the board and you are making decisions in that company, yes, you can influence stock of the company. So that's just something to consider, the control over the investment. And then number five, cash flow. Does it provide a monthly or annual positive cash flow and income stream? If it does not, it's not an asset and not something we should not invest in, then it's a liability. And then we also look at the return of investment, and that ranges over asset clauses. We won't get too much into detail, but obviously if you invest money to get a return, you're putting up money, and therefore you should be rewarded by getting a return and cash flow.
And then number seven, market risk. Does this asset or investment vehicle provide a return on all markets? So markets go up, down, and sideways, when we do that we do not know, does it provide a return in all markets? And then the eighth one is, “What is the exit strategy?” Every single professional investor goes into an investment knowing already what is exit strategy is and his strategy with this investment. He knows how long he's going to hold on to that investment, when he's trying to sell the investment. He has a whole plan worked out before he even buys or invests in the investment. So those are some of the important factors I would list. I would love to hear your comments in the comments section if there are other factors that you would add in there. I would say also it's really important to build a solid foundation first of creating a mindset you need to become an investor, and then invest first in your financial education, and understanding the difference between an asset and liability, and then creating your own checklist and rules before you consider to invest in anything. Until next time. Live a life of passion and purpose on your terms.
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