Following is a continuation of John's 17 Rules for Active Investing. Click here to read rules 1 - 9
10. Don’t Wanters
I buy from people who really do not want their property.
This means that I generally buy my properties from highly-motivated sellers (trustees of deceased estates or bankruptcies, liquidators, vacant properties, builder closeouts, mortgages in possession, sheriff sales, mortgage sales, trustee sales, foreclosures, etc.).
If someone does not want a property, he or she is much more likely to be flexible on price or terms to dispose of it. You are entering the market on Wholesale Price and/or Wholesale Terms which will allow you to easily determine your Profit at Purchase.
In any market, no matter how good, somewhere between 2-5% of sellers are highly motivated to sell. Though these deals take effort to find, my students from throughout the world all find them. Whether you are in the United States, Canada, Asia, Australia, New Zealand, South America, Europe, or Africa, these opportunities are readily available to the Level Five Investor who knows how and where to look. And when presented with a written wholesale offer, these sellers will often respond in ways that allow the Level Five Investor to lock-up a Profit at Purchase.
11. Cash Flow
Although I make a Quick Cash profit from the sale of a property and I often acquire properties intentionally to flip just for Quick Cash, I do prefer to generate as much of my profit as possible in the form of Cash Flow. That is my Game and what I love: Passive Income.
To achieve this, I acquire properties wholesale and then re-market them at retail with Vendor Financing (owner financing) or a Lease Purchase Agreement.
“For me, wealth is Cash Flow, not cash. My problem with cash is that it has a tendency to get spent. Cash Flow continues ad infinitum.”
I prefer the liberating power that comes from receiving a check at the beginning each and every month whether or not I work directly for it.
For me, wealth is Cash Flow, not cash. My problem with cash is that it has a tendency to get spent. Cash Flow continues ad infinitum.
12. Lunch Pail Joe
Although I do use several investment vehicles, my main specialty is Real Estate. And in regard to real estate I primarily invest in single family homes that meet my “Lunch Pail Joe” definition as follows:
A. Price 20% or more below the median (not average) price of the target area;
B. 3 bed/ 1 ½+ bath (1000-1500 sq. ft./100-160 sq.m.);
C. Covered parking;
D. Fenced yard;
E. Livable condition;
F. Acceptable neighborhood;
G. No more than 60 minutes away from my home or office (unless you live in a very rural area).
I have found that by investing in “regular houses” in “regular neighborhoods” where “regular people” live, I am in a position to profit whether the market is good or bad. The reason: people always need places to live. And in regular neighborhoods you always have a market because people are continually moving up or moving down. For real estate investing purposes I greatly prefer “regular” houses.
13. No Emotions
When I invest, my primary concern is the Return on Investment after Taxes (ROIAT). In an investment, what matters most is the Bottom Line: The Money and the Numbers.
I don’t care what color the carpet is or about the pretty garden. Just give me the numbers and I’ll show you the money!
The numbers are the most important aspect of investing. Emotions should never play a part in the investment decision. I always tell students who contact me for assistance, “Don’t tell me about the house. Tell me about the numbers.” Be like the professionals. Don’t get emotionally involved. Get rich instead.
I want to make this very clear – Level Five and Level Six Investors have no room for emotion while conducting business. The reason: If you become emotionally involved in the outcome of the deal, the odds dramatically increase that you will change YOUR RULES in the middle of the transaction. The usual result is DISASTER! Emotions such as fear, anxiety, panic and greed have a tendency to control decisions in relation to investing and cause you to sabotage your due diligence of the “money and the numbers.”
“If two persons equal in judgment play for a considerable sum, he that loves money the most shall lose; his anxiety for the success of the game confounds him.” Benjamin Franklin
This does not mean that you have no emotion attached to what you do. Make no mistake. If you don’t have an underlying love for Your Game you are likely to fail or at best under-achieve. If the deal stacks up you are allowed to “feel good” about “the money and the numbers.” This is not really an emotional reaction. Your response should be purely analytical, based on the deal satisfying YOUR RULES.
Be prepared to make some mistakes or errors of judgment when investing. Learn from them and leave them behind. Do not attach emotions to these experiences. Take the lessons analytically. You love the Game, not any one deal or investment. Your future does not depend upon the success of any one deal or investment (at least not if you follow The Nine Generalized Principles of Investing). The numbers make the deal. Learn to love them too.
14. Ride Winners and Cut the Losers
I have learned that most people “Cut their Winners and Ride their Losers.” They often do this because of the recommendations of their “professional” advisors.
Stockbrokers, for example, are trained to tell you to “sell” when you make a small profit and to “hold” onto shares that have gone down. Why would you want to sell an investment that was going up, or continue to hold onto one that had dramatically fallen in value, when there were better opportunities elsewhere?
Brokers are trained to give you this advice for two reasons. First they understand that psychologically most people have a HUGE need to be right. They know that if you have lots of “wins,” no matter how small, you will feel good about yourself. You can tell all your friends about how you made money in the markets with your great broker.
“Tis known by the name of perseverance in a good cause, - and of obstinacy in a bad one.” Laurence Stern
They also know that most people cannot psychologically accept losses and that is why they tell you to hold onto your shares that have gone down. For most people, not actually selling means they don’t have to deal with the loss.
They can pretend it is not really a loss because they fool themselves into thinking that the stock will come back some day (NOT ALL STOCKS COME BACK!).
So, they just continue on their merry way constantly selling far too early their good shares and holding onto the bad stocks for eternity. They “Cut their Winners and Ride their Losers”.
The second reason this advice is sometimes given is because the broker wants to continue to make commissions when you sell and then reinvest (over and over and over again). This is called “churning” and it generates a steady stream of commissions for the broker and the brokerage.
How often have you or someone you know sold an investment for a respectable profit only to see the investment continue to go through the roof? Do you know someone who sold Intel, Dell (or Commonwealth Bank in Australia) five years ago?
Conversely, how often have you held on to an investment despite the fact that it was a “Dog” hoping that some day it would come back? How often has your dogged determination to be right cost you dearly?
Top Investors “Ride the Winners and Cut the Losers.” They do this primarily through strict money management and tight control over their own investment psychology. You should learn to do the same.
“Half the failures in life arise from pulling in one’s horse as he is leaping.” Julius Charles Hare and Augustus William Hare
15. Invest Long Term
Most people look at far too short a time frame in regard to their investments. They spend much time chopping and changing, running around looking for the next “Get Rich Quick” scheme or hot investment. The reality is that there are very few surefire and rapid-fire roads to riches. Rather, the majority of get rich investments take time to bring home large returns. Like the reality of the 20-year overnight success in show business.
“Be prepared to make some mistakes or errors of judgment when investing. Learn from them and leave them behind. Do not attach emotions to these experiences. Take the lessons analytically.”
That is why when I invest, I primarily do so for the long-term. I am not interested in “spending” assets after short or mid-term gains. I am looking towards my longer-term goals of wealth building and stewardship of my assets. Many of the best investments carry with them the power of compounding and Lag and are not designed to be readily capitalized upon over the short term.
So when you assess an investment, be clear on your goals, your Dividend Expectation Timeframe (DET) and do not ignore an investment simply because you believe its benefits are not instantaneous. Check the numbers and understand the power of money invested over time. You are building wealth and this takes time. I invest for the long term.
“People have an overwhelming desire to be right…People want to take profits quickly and give their losses some room. This gives them the illusion of being right, but what they are really doing is 'cutting their profits short and letting their losses run.” --Dr. Van K. Tharp
16. Open Mind to Adapt My Rules
Always be prepared, based upon your Market Research, to adapt YOUR RULES to a changing market to your own best advantage. Many businesses fail dramatically due to dogged determination to stick to timeworn, but inflexible business practices or attitudes.
You must always keep an open mind in relation to the expectations and changes of your market. Nowhere has this requirement been more dramatically demonstrated in recent years than in the effects and market expectations for e-commerce on western world businesses.
17. Continuing Education
Keep current on the Market Research at all times and practice your skills of Lateral Thinking to keep up with or anticipate the changes. I am constantly attending seminars, reading and learning. Throughout the world I seek out the best teachers and information I can find. I then pay to attend their seminars as a student to learn what they have to teach.
Even if the seminar or material proves to be disappointing, I can always learn at least one new thing. Often there is considerable value in learning what is not important, valuable or legitimate, and thereby reinforcing what you already know.
I strive to continually learn more to improve myself, my relationships, my psychology, my business and my investing. By attending seminars, listening to tapes, watching videos and reading, I accomplish this. Education is an ongoing process and I strongly encourage you to continue your learning.
If you aspire to become a Level Five Active Investor I recommend that you take a long hard look at how your Principles and Rules compare with those of top Level Five and Level Six Investors.
Reinforce those things you are doing right and learn from those things that you need to change. Make sure that you continually review The Nine Generalized principles and you are staying on tope of your Market
I know that if you apply the Nine Generalized Principles and follow YOUR RULES that you will WIN “The Money Game.”