During the downturn in the economy many people were using quotes from people like Warren Buffet that explained why scooping up smart investments, while other people are running from them, can often be a good idea.
And who can argue with the Buffet?
One knock against Buffett has been that his principles are old and outdated, that the economy has changed to a point where his philosophies don’t apply to the same degree any longer.
In fact, he was often ridiculed by many people in the financial industry during the technology bubble in the late 90’s. People wondered why he had missed out on so many of the fast-rising stocks.
Buffett couldn’t understand the valuations being put on these companies since they had no income coming in. These high flying companies were nothing more than ideas. They had no revenue coming in, or even worse, they had no plan for how they were going to create revenue.
And low and behold those valuations couldn’t hold and the short-term high flying investors crashed and burned very quickly.
His detractors were right though, his principles are boring. There is nothing too exciting about investing in companies with solid track records that produce something people need and are willing to pay for.
Gee, it almost sounds like he follows a core set of solid principles that have proven correct year after year.
They also sound similar to finding an area with a solid foundation (solid track record), investing in a starter home or apartment building (produce something people need), offer it to the market at a profit (generate revenue).
Let’s not dumb down the process too much but really when you look at the most successful investors in the world with a proven track record these core principles are the same. Yet it is so boring that we still continue to go out and try to find the next big breakthrough to make it big.
We were sitting with our accountant a couple of months ago talking about the successful businesses he has seen over the years when he blurted out “The turtle wins the race.”
This is a man that has seen hundreds if not thousands of different companies roll through his doors during the years and he has also seen that the companies that follow the same proven principle of focusing on cash flow are the ones who survive and prosper.
He explained that several colleagues of his, who should have known better, jumped into some of the business opportunities that a few of their clients making “fast money” were involved with … only to ultimately lose money several years later.
Now, as decades have passed, one of his Accountant buddies commented to him that, “Although I always discounted companies that made money slowly it seems, upon reflection, that the turtles always win the race. They’re the only ones that have any real staying power.”
A Dunn & Bradstreet report found that “businesses with fewer than 20 employees have only a 37% chance of surviving four years (in business) and only a 9% chance of surviving 10 years.”
We would be willing to bet that the number of real estate investors that succeed over the long run is even smaller.
It is the result of past investor failings that have led to some of the recent mortgage changes from CMHC.
Too many people are ‘investing’ by purchasing pre-built condo housing, crossing their fingers, and hoping it goes up in value.
And many of them look at the basic need of generating positive cash flow from rents as old-fashioned thinking.
Yes, some of them will be making money but the slightest wind of change in prices can cause some real pain in businesses that don't generate cash.
Just like what happened with the tech bubble about 10 years ago.
So what is the most important principle of all? It is investing for cash flow.
That way any change in the value of your asset will have much less impact on you as long as you are generating more revenue than your expenses.
It is a basic business principle, nothing too fancy or complicated. But it works! The value of your company (properties) can continue to change but as long as you have a positive net income you are on solid ground.
But wait, can we really take these business principles and make them work for our personal investments?
Let’s take another look at how Buffet invests for himself personally. Robert Miles reports that although Warren Buffet only makes $100,000 yearly salary from Berkshire Hathaway he is able to live off his personal portfolio which generates $43 million in annual dividends.
Wikipedia.org explains that “dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.”
He's paying himself with the positive cash flow of his businesses.
Yes, it is simple.
Yes, it is timeless.
Yes, it may even be boring.
And watching a turtle can be boring until the turtle wins the race!
Here’s one thing that keeps us focused and blocks out distractions…
We’re looking to acquire and own assets that produce income. So perhaps one day we’ll take half of our portfolio and sell it to pay off the other half completely—and then we’ll live off our own assets, free and clear, that produce consistent income.
That's our race.
Perhaps it’s ultimately owning five properties free and clear and living off the income? If that’s your goal 5% or even 15% changes in your property values won’t matter when they’re fully paid off! If you’re making $10,000 a month in cash flow a change in property values don’t really matter very much do they?
While everyone else screaming about the housing market you can be enjoying wine tastings in the French countryside ... and we’ll see you there!
Great plan guys! Having fully paid off properties is a huge accomplishment. Its amazing how The Buffet got soo big because he started soo small. What an icon!