The two most important words in financial vocabulary are Cash Flow. Cash flow pays our bills, supports our lifestyle and helps us buy more income producing assets. Banks love cash flow. They will loan us money to grow rich if we have cash flow. The most difficult times in our lives are when we do not have adequate cash flow and are unable to meet our financial commitments. In the worst case scenario if we lose sight of our cash flow we can go bankrupt.
No one can rely on cash flow from jobs in this fast changing world where companies are downsizing and artificial intelligence/ robots will soon be replacing human beings. For example driverless cars will replace humans which are one of the biggest sources of employment.
Accumulating high return cash flow assets that give passive income is the stepping stone to becoming rich and freeing ourselves from financial tensions of our daily life.
The problem in today’s world is that all assets seem to be overvalued. There is a fear that too much money has been printed by the governments in order to recover from the 2008 financial collapse that can trigger even a bigger economic crisis in the near future.
According to Warren Buffet buying cash flow positive assets for capital appreciation is pure speculation. The value of your stock may collapse tomorrow. You have better control of your investment if you buy for cash flow based on return on investment. Even if the price of stock goes down you will not get into trouble because of the cash flow from your investment. He advises against buying gold or art works that give no cash flow and are only speculative in nature.
How do we invest in stocks when PE (price earning) ratio is extremely low because stock prices are over inflated beyond rational limit? There is virtually little or no cash flow from dividends. Same is the story from properties where inflated prices of homes have reduced net returns into negative territories. What happens to these investments when inflation rears its ugly head and interest rates rise?
One option is to ride out the current storm by investing in debt funds and remaining cashed up for the economic crash when great wealth shift will take place as being advised by financial gurus including Robert Kiyosaki. What happens if the great crash does not happen and the world settles down to the low growth rate like Japan with zero to minus interest rates? Should we stop accumulating assets due to fear of the future crash that may or may not happen?
A prudent move will be to lower financial leverage and investment cautiously by not lowering the criteria for cash flow. To buy cash flow positive assets in this highly inflated market needs knowledge and patience. To grow financially one has to continuously buy assets. But don’t get pressurised into buying assets for the sake of investing if it does not meet your buying criteria.
The trick is to buy assets that are below value so that they have adequate cash flow and then add value to those assets to increase cash flow. Avoid over exposure to financial leverage in current market conditions but use other forms of leverage to build value such as technology. Sensible leverage is needed for accelerated growth and increasing cash flow from your assets.
You must also take a serious look at your current assets and check how they are performing. They may have risen in value over period of time and returning low cash in form of dividends and rents. Compare the current value to the return they are generating. You must sell assets that are generating low returns on current value and buy assets that will generate you higher cash flow. In this way you will not only increase your current cash flow but also position yourself to invest in opportunities when markets go down from their current levels.
Another important aspect is having control over your asset so that you are master of your own destiny. Warren Buffet invests in companies wherein he has adequate shares to get a seat on the board of directors. If you are on the outside you have little knowledge and no control of the company. You have to either have controlling shares or at least become an insider to know how the company is functioning to protect your investment.
When starting out you may not have enough money to become an insider in large corporations. Invest in small and medium sized companies. Better still start your own company and be in command of your expenses and income. It does not take big investment like the good old days to start a company. Internet has leveled the playing field. The only thing you need to do is invest in your knowledge.