Other people’s...EVERYTHING!
Think back to the S and B sections of the CASHFLOW Quadrant. What does it take to move from being an S, self-employed, to a B, a business owner? Think of the conductor of an orchestra. He never makes a sound himself. He is a leader. The moment he picks up a horn or a woodwind himself, he is no longer the conductor. In contrast, someone in the S quadrant is a one-man-band operating at his maximum capacity. He might be making lots of noise, but he simply cannot generate enough sounds to become a full orchestra on his own.
Another advantage of a business is that it can simply start as an idea. If a person builds a business plan with strong leadership, a strong mission, and a strong team, that person has created an asset. The business plan in and of itself can attract the people and capital to make it grow.
If you are a good leader and have a creative mind to solve problems, you might have what it takes to be a business owner. If you are resilient and good at raising capital and love bringing value to the lives of others, then you will likely enjoy business even though it is by far the most difficult of all the asset classes and has the lowest rate of success.
Real Estate
My friend Ken McElroy, Rich Dad Advisor for real estate, always mentions three things when he teaches real estate:
Partners - Financing - Management
I’ll leave most of this to Kenny to explain on another day. But to make it simple, while business is about OPE, real estate is about OPM: Other people’s money. It’s about financing, management, partners, and structuring the deal—which is really all about going into debt. It’s ironic that while most people are trying to stay out of debt, Kenny is actively trying to go into debt. (And it’s working for him.) Like the fear of fire, many people are scared of getting burned by debt, so they prefer to stay away from the flames. But fire can be both good and bad. It can be used to heat your house or it can burn your house down.
Successful real estate investors like Kenny have replaced fear with respect. They study debt; they master it. They know the difference between good debt and bad debt
Real estate is attractive to many investors because it uses debt as a lever. It is a very popular way for someone to literally use other people’s money to create cash flow and wealth.
If I go to a bank and ask for a loan for a business, they will typically have me jump through a series of hoops as they try to evaluate whether I’m worth the risk. Borrowing money for real estate, however, is a very different story. Banks or private investors will loan money for real estate because the real estate itself can act as collateral. If I’m not able to repay the loan, the bank will simply take back the property and sell it. That’s why lending money on real estate is much less risky.
With real estate, the investor has control and can actually increase the value of the property, as well. It’s one of the biggest advantages real estate has when compared to other assets, such as stocks. For example, if you buy an apartment building, you can renovate the building, update the appliances, raise the rents, and so forth. This is called forced appreciation. And the ways to do it are almost limitless.
Commodities
Commodities are about the hedge. Currency loses value; commodities retain value.
Commodities are used by investors in many ways. For example, you might receive monthly cash flow from your ownership in an oil well. Or you might receive a capital gain if you see a trend in the supply and demand of corn. You might buy some precious metals to hedge against a falling currency.
Commodities are those essential things we need in order to live, or the things we hold most valuable in society. So a person who owns commodities is in a position to trade. For example, if you own a lot of oil and people want to drive their cars, you have what they want. By owning an in-demand commodity, you are in a position of power.
If I have four strips of bacon and you have four eggs, we can trade with each other and both have breakfast without ever having to exchange regular currency. Currency is simply a way to make trading easier. But when a currency breaks down, we have to revert back to basic bartering.
How does this trading work? It’s simple. You can take an ounce of gold anywhere in the world and trade it for things that you want or need. It’s an in-demand commodity with real value. You trade that value for other things of value.
Paper Assets
This book focuses on the stock and options market. While there are other kinds of paper assets available to investors, we are limiting our discussion here to stocks and options.
A stock is a share of ownership in a company that is publicly traded on the stock market. The ownership of every publicly traded company is divided up into a specific number of these shares, and the number of shares is different for each company. So when you buy a stock, you are essentially buying a share of ownership in that company.
An option is the right to buy or sell a stock for a particular amount within a set amount of time.
Stocks Are Liquid
When investing in stocks, we can choose how we want to get profits. The two primary approaches are to seek capital gains (selling our stocks at a higher price than we paid for them) and to generate cash flow (creating new money). Seeking cash flow is my personal favorite because it allows me to control the situation better than just buying stocks. Either way, the stock market offers us the ability to easily buy and sell our paper assets.
By comparison, right now there are many people who would love to sell their real estate. But there’s just one problem—not as many people can get the financing to buy real estate today. As an investor, when you face a situation where it’s difficult to sell an asset because of market conditions, it is said that the asset lacks liquidity. Liquidity is the ease with which an asset can be converted to cash. It is important for us to consider the liquidity of an investment so we can always have a beneficial exit strategy. That’s one thing you will love about the stock market—it generally offers investors good liquidity. If one of your stocks begins to go down, the market liquidity means you can sell it quickly before you have sustained a damaging loss. It also allows you to go from a good investment to a better investment in the blink of an eye.
Another advantage of liquidity is that a person doesn’t need to have tremendous sales and negotiation skills. In business, those skills are vital. And developing those sales skills takes time and practice.
There’s some irony to the liquidity of the stock market, because very few people actually take advantage of it. Many investors hold the same stocks and mutual funds year in and year out, and never think about selling a good stock for a better one or using any kind of exit strategy to maximize their profits. There is also a little hypocrisy here on the part of the big institutions that tell you to buy and hold. Stocks only fall when there are more sellers than buyers. While you are holding, the large institutions are often the ones selling!
Another thing to consider is that the liquidity of the market can bring an increase in volatility. The ability to buy and sell quickly can cause huge swings in supply and demand. Depending upon your situation and investing goals, this can be either a huge negative or a huge positive. There is not a one-size-fits-all answer. I predict there will be even more volatility in our market in the years ahead. But your investing strategy can use that volatility to your advantage.
Stocks Are Agile
When most people think about profiting from
