What to Look for in an Investment

With the economy in the state it's in, scandals, & massive financial losses, I wanted to talk about what it means to really invest & what I personally look for when making an investment. One man that I've learned tremendously from is Robert Kiyosaki.

What is an investment? Is it a:
1. Hot stock tip from your friend
2. Commentator on CNBC saying, "blah, blah, blah"
3. News article recommending company ABC
4. Commercial touting the latest company XYZ
5. Buying a stock today at a low price & selling it a few days later.
6. "Flipping" a house.
7. Mutual fund advisor saying, "Work hard, save, invest in a diversified portfolio of mutual funds in your 401k".

(PS - the answer to all of the above are NO. These are not investments).

Planning for your financial picture encompasses investing to speculating. The key difference between investing & the latter is cash flow. Cash flow provides immediate income. It puts money into your pocket, right now, today. Examples would include dividend, option-writing stocks, & cash flowing real estate & businesses.

If I buy shares of company XYZ that provides a dividend, that stock would be an investment. I could also write options against my stock every month that would provide immediate, controllable, increases income. In real estate, if I acquired a property, rented it out to reliable tenants, and if the rent provided extra income, that would be an investment.

Notice how I did not mention either stocks or real estate increasing in value over time, otherwise known as capital appreciation. In the long run, stocks & real estate tend to appreciate in value. However, as we can see currently, this is not always the case, & timing the market is not very reliable, nor is it very predictable.

Buying for capitals gains is like icing on the cake, but not the primary reason you buy the particular investment. Even if stocks & real estate have decreased in value (such as current times), if they provide cash flow, you still have money to live. So cash flow is like oxygen. You have to have it, or you can't survive. Additionally, with capital gains you are hoping, wishing for appreciation. Hoping and wishing are not strategies I would employ when investing.


Here's how I divide investing:
1. Person
2. Vehicle
3. Knowledge & experience

Person: To invest you need to know your personal profile. Your goals, your tolerance for risk, your time horizon, how active do you want to be. If you are conservative, don't want to manage your portfolio, a lot of people would recommend mutual funds, although I would not recommend this route. Rather, I would work on increasing your financial education. If you are more active, have more experience then how about getting into stocks, options, currencies, interest rates, commodities, futures? Or what about real estate? Do you want to be a flipper, or do you want to buy real estate & then rent it out? Do you want to do it full time, making several deals a month? or do you want to do it part time buying one property a year? Again all of these depend on the person.

Vehicle: Stocks are stocks, real estate is real estate. No one vehicle is better than the other. It's how the person uses the vehicle that characterizes their particular investment style. Everything has its advantages & disadvantages. What I like about stocks are that they are paper investments. No hassles. I can easily get into & out of them if I so choose. I can use options to generate income, mitigate risk, acquire stocks for cheaper, & sell stocks for higher prices. What I don't like about stocks are false financials, corporate fraud, scandals, & manipulation by Washington/Wall Street. While I do own a successful company that trades stocks & options, I am personally moving towards real estate & businesses because I can actually see these investments. And my income from these investments comes from creating value for others.

Knowledge & experience: Most important. After knowing yourself, I would focus on increasing your financial IQ. Know what you're investing in & why. Gather more knowledge & experience. Go to seminars, meet like-minded people. Avoid salespeople, "advisors", conmen, "too good to be true" advertisements. Get a mentor, someone who's done what you want to do. Talk to people whom you trust (hint: not politicians, media, brokers, analysts). Read books such as Rich Dad, Poor Dad. I like books like this because they provide reality-changing ideas, while delivering outstanding content. If you increase your financial IQ, you'll be much better off. Start slow, learn, & then gradually work your way up.

So here are some criteria I place when making an investment.

1. Control
2. Cash Flow
3. Leverage
4. Tax advantages
5. Risk mitigation
6. Assets that I can physically see
7. Passive, automatic, residual

As with all things, making good investments is like making good decisions. It takes knowledge of yourself, planning, experience, & patience.