We will begin this article by talking about The Game. For the purpose of clarity you should understand when I say, The Game, I am referring to Money.
I call it The Game because to Level Five Active Investors that is exactly what Money and Investing are: a game. A game that we all love to play to win!
I have a list of the nine generalized principles of investing, in which the generalized principles apply to ALL situations, whereas, RULES are personal and are used to set up how you invest.
In fact, this concept links to the first and most important of The Nine Generalized Principles of Investing. To play The Game you must LOVE what you are doing. To be a successful level five active investor you must do something that excites you, moves you and thrills you. Without this passion for what you do, life's challenges and learning experiences can all too easily knock you off your path.
"To be a successful Level Five Active Investor you must do something that excites you, moves you and thrills you."
The concept of the game of money can be broken down into practical steps that you can apply:
- Discover an area of investing that you feel is a "Good Fit" for you;
- Apply The Nine Generalized Principles of Investing ;
- Develop your own rules to The Game.
After you have found your area of investment passion and applied The Nine Generalized Principles to it you must then apply YOUR Rules to The Game.
Remember that it is YOUR GAME and you can play it any way you want. Be like a little kid: if others won't play your way then just take your ball and go find others who will play your way. Take a good look at the rules (conscious or automatic) that you are currently using with regards to money and investing. Are YOUR Rules empowering or limiting your financial success?
A typical example of how rules can limit your success: I have met people who tried something and it didn't work the first time so they decided NEVER to try it again.
Maybe this sounds familiar? The scenario might run something like this: you decide to buy shares based on a "hot" tip you got at the water cooler. Of course, right after you buy (at the top of the market) the share crashes to an all-time low, wiping out half your money. You sell immediately and decide to NEVER invest in the share market again because it is too risky.
For many this example may be all too real.
The problem with your action is not that you bought the shares or that you lost money but that you decided to NEVER invest in the share market again because of the loss. You made a Rule that will prevent you from EVER making money in the Stock Market.
And your "rational" mind will constantly remind you of YOUR RULE. Regardless of how good the market is, you will not participate. When anyone ever questions you on why you will not invest in the market you will defend YOUR RULE to the end of the earth with endless "logical" reasons why one should never invest in the stock market. This is your own "intelligent" psycho-babble. The end result: you lose because you are out of The Game!
What you must understand is that there are:
"Rules for Winning"
"Rules for Learning."
In the example cited, what you should have done is learned what you could do differently to enhance your probability for success. In the future: do not buy impulsively at the top of the market; check the source of your information; do market research; use a stop-loss to limit your potential liability so you cannot lose so much, etc.
Translation: add a Rule to never play that way again, not a Rule to never play The Game (invest) again.
EVERY day I learn new ways to do something or to not do something. I never quit The Game. I merely adjust My Game to incorporate what I learned. You should do the same.
1. My Rules
Rule Number 1 is that I play by My Rules, not the rules of anyone else. Level Five Active Investors know that they must have control at all times. Thus they cannot play by the rules dictated by others (such as so called "expert" financial planners, accountants, lawyers, tax planners, brokers and bankers who all too often play by the rules of "It Can't be Done" or "We Don't Do That Here"). Level Five Active Investors design their own Rules and adapt the world to them rather than complying with and adapting to the rules of others.
Note: this does not mean breaking the law! All that I do, whether in the area of business, tax planning, entity strategies, or investing is all completely legal and above board. There is no room in the business and investing world of the Level Five Active Investor (where your reputation is as vital as your skills), for shades of gray. There is no need. Everything I could ever want to do can be achieved using my own rules, within the framework of existing laws, regulations and codes. I only do what is "white as the driven snow." I strongly recommend you do the same.
2. The Nine Generalized Principles of Active Investing
Always respect and follow The Nine Generalized Principles of Active (Level Five) Investing. They are the blueprints upon which to build your Rules.
It is my belief that the most important quality a person can demonstrate in business and in life is Integrity. If I find that the people I am playing (working or investing) with do not have Integrity I stop playing (doing business) with them. I take my ball and go home. And I only play games (businesses and investments) which are compatible with and can be fashioned around my integrity beliefs.
"Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful." Samuel Johnson in Rasselas (1759)
I have learned the hard way that people with a lack of or questionable Integrity will usually turn on you or let you down before the deal is done. Always remember:
The Integrity of the other person is more important than any other aspect of the deal!
"More men come to doom through dirty profits than are kept by them." Sophocles
Integrity must always be your starting point and your ending point. If you deal with people without Integrity you will damage yourself each time. Their association or short-term profit appeal is not worth the sacrifices you will invariably make.
P.T. Barnum wrote in an often-delivered speech entitled "The Art of Money-Getting" the following passage on Integrity and its relationship to wealth creation:
"It is more precious than diamonds or rubies. The old miser said to his sons: "Get money; get it honestly, if you can, but get money." This advice was not only atrociously wicked, but it was the very essence of stupidity. It was as much as to say, "If you find it difficult to obtain money honestly, you can easily get it dishonestly. Get it in that way." Poor fool, not to know that the most difficult thing in life is to make money dishonestly; not to know that our prisons are full of men who attempted to follow this advice; not to understand that no man can be dishonest without soon being found out, and that when his lack of principle is discovered, nearly every avenue to success is closed against him forever.
The public very properly shuns all whose integrity is doubted. No matter how polite and pleasant and accommodating a man may be, none of us dare to deal with him if we suspect "false weights and measures." Strict honesty not only lies at the foundation of all the success in life financially, but in every other respect. Uncompromising integrity of character is invaluable. It secures to its possessor a peace and joy which cannot be attained without it - which no amount of money, or houses and lands can purchase."
Integrity! Find it within. Follow it through everything you are and do. For without it you are incomplete and live without true meaning. One last thought on Integrity. A very wise person once said, "Once someone shows you who they are, believe them!" In other words, if someone shows you once in a business dealing or in general life that they do no have Integrity…BELIEVE THEM! They will invariably continue on their path of deceit and dishonesty in their dealings with you until you no longer let them.
4. Know the Rules
Before I play The Game I want to know four things:
A. The Rules of the Market;
B. The Rules of The Game (based on my Niche);
C. The Rules to maximize ROIAT (Return on Investment after Tax) Maximization;
D. My Personal Rules.
5. Buy Wholesale
As an investor I know that to make a profit I must buy wholesale (or sub-wholesale) and then resell at retail (or just below). This is what all great investors do in one form or another, whether they are buying shares that are under-valued or out of favor, vehicles at below blue (or red) book value or real estate at wholesale prices.
When I invest I need at least one of two aspects of the deal to be wholesale: I need wholesale price or wholesale terms. Wholesale purchase price means the amount of cash in the deal will produce a retail sale price. Wholesale terms will produce higher cash flow to compensate for the higher than wholesale purchase price. Wholesale price and wholesale terms in the same deal is the Level Five Active Investor's nirvana.
6. Profit at Purchase
Make your money when you buy, not when you sell.
When making a decision on how much to offer for a property I make my decision solely based on the cash flow or calculated capital gains profit after expenses (not potential appreciation or negative cash flow (negative gearing) tax benefits).
I NEVER include tax savings or appreciation for the simple reason that they are undetermined, constantly changing, and not guaranteed.
Beware of salespeople cloaked as Real Estate Agents or Marketers, Stock Brokers, Financial Planners, Investment Advisors, etc. All those fancy charts, brochures, and presentations are designed to fool you. Do not ever buy an investment based on "projected yields" or "future appreciation" or "potential tax savings." That is the "game" of the Level Three Investor.
Bypass promises and hype: Stick to the "Money and the Numbers".
Whenever these salespeople approach me with their investment schemes I tell them the following: I have an investment portfolio of several million dollars. I consistently make 50-100%+ annually on my investments. However, I am always looking to improve my return. At this point in the conversation the salesperson gets very enthusiastic as they begin to go into their sales pitch, telling me how they can make me all this money. I ask them to send me a copy of the audited financial statement.
I tell them that if they are doing better than me (on return, not necessarily net worth) then they have got my money (to invest). I also ask for a copy of their last statement showing how much money they have placed in this investment.
Guess what? In all the years not one investment salesperson has ever responded to my requests. The reason? They probably don't really know what they are doing and they probably do not have any of their own money invested in the product they are offering (nor any other investment for that matter).
When it comes to investing I care abut two things: The Money and the Numbers! The REAL numbers! What is my cash-on-cash return going to be this year? If I cannot make money now, I am not interested in the deal. Period. End of story!
7. No/Low Risk Idea
Presently I only have at risk a small percentage (less than 1%) of MY net worth in any one investment. I do this because even though I have never lost money on a Real Estate investment, I continue to eliminate the possibility (fear) of being financially ruined by a couple of deals gone bad.
"My ventures are not in one bottom trusted, nor to one place; nor is my whole estate upon the fortune of this present year. Therefore, my merchandise makes me not said." William Shakespeare's Merchant of Venice
However, when I first became an Active Investor I often risked up to 10% of my net worth in a single transaction. The reason was two-fold: I had a relatively small net worth; and I wanted to maximize Leverage to accelerate my wealth-building process. If I had taken a loss at that time I was confident that I would still move forward. That was my mindset. Those were My Rules. Bear that in mind. For many people a loss would have resulted in a full retreat from ever investing again.
Clarification: When I say that I only have less than 1% of my net worth at risk in any one investment, I am not saying that I only have 1% invested in total. What I am saying is that I have used Level Five Investment techniques (Principles and Rules) to limit my downside risk to just 1% of any given investment. I generally have at least 90-95% of my investment capital invested at any one time. Just not 90-95% of it at risk! I minimize my risk by following proper money management risk reduction strategies.
Bottomline: Never risk more than you are able to lose and willing to persist investing without.
8. Other People's Money
One money management risk reduction strategy is to use OPM (Other People's Money) to further reduce your risk. I have done this to the point where I have acquired over 150 properties using none of my own money. (Many of my students throughout the world have done the same types of transactions.)
That's Leverage with No Money Down! Using OPM is part of Rule #7 because it is as No/Low Risk as it gets. If I have no money in the deal, I have no money at risk.
In addition, Leverage allows me to do far more transactions than I ever could on my own. I often do transactions with partners because I know it is always better to have a piece of the pie than none of the pie.
My partners are willing to take on the risks for the capital invested and thus my risk is minimal. My Integrity is what my partners rely upon over time, not on the basis of any one deal (although they are of course backing my business acumen as well). My partners are willing to risk their capital for good returns and I stake my expertise and my reputation for the opportunity of leverage offered by their investment capital.
The relationship I have with my investors (money partners) has produced tremendous success over the years and we have NEVER lost money on a real estate investment. In fact, I cannot even conceive the possibility of losing money on real estate. My Buy Wholesale Investment Rule and my business systems are all designed to ensure that we do not ever lose money on a deal.
9. Money Back
I have structured my transactions so that if I have money in the deal I get all of it back in the quickest possible time.
Remember, one of the major objectives for money is to employ it so that it works for you. Once you retrieve your initial investment capital, your money begins working for you at a rate of return of infinity (which, by the way, is the best possible rate of return!)
I invest in such a way that my money partners and I get all of the principle back within 1-2 years which means that we make 50-100%+ rates of return on each investment (each property).
Read Part 2 of this article for more of John's investing rules:
My Personal Rules of Active, Level Five, Investing for 20-100%+ Returns! (Part 2) >>