One of the oldest and most important notions in Finance is the statement that “Cash is King”. The purpose of this cliche is to focus examination for a business deal, product decision, or prospective investment on cash flow. This is especially important when the accounting profit & loss is different from the cash flows.

Consider the difficulty of running a business where all of the value comes from a future sale of the business to somebody else? What happens if large losses must be absorbed until the future sale? What happens if the future price is lower than your projections? How much of your future are you willing to stake on anticipated gains that may not materialize?

This is not to say that all focus should be on short-term results, with no thought of the long term. Quite to the contrary, we should view the future as an opportunity that is waiting to be discovered. However, we should avoid the trap of vague ideas about value or gains. If a deal or investment is a sound decision it must produce results. (Typically measured in terms of cash)

Consider the paradigm shift of stock market investors away from dividends (cash flow) toward capital appreciation. During the bull market of the ’80′s and ’90′s, values climbed and people simply assumed that they would keep going up. After the tech and credit bubbles, values have become highly volatile. In order to capitalize on value gains, you must know when to sell. Since nobody knows when markets will break up (or down), market timing has become a very risky proposition.

In the end, each of us must learn to incorporate the lessons of cash flow into our investment and financial decisions. This frequently requires that we move contrary to most other people, since fads are what create (and destroy) market bubbles. By maintaining an even focus, it will allow us to achieve ever greater heights of success.

 

One of the personal financial topics that many people desperately avoid thinking about is that of insurance, specifically life insurance.  The most prominent reason for this is because most people do not fancy the thought of their own demise, and choose to avoid, rather than confront this risk.  Another reason is because there are many insurance products available, and many people get confused.

By and large, the two predominate forms of insurance are Term and Permanent policies.  As the name suggests, a Term policy lasts for a pre-determined length of time and then goes out of force.  Similarly, a permanent policy is designed to stay in force perpetually, building cash value until the benefit payout at the time of a person’s death.

Insurance agents frequently point out that most Term policies do not pay their benefit, and that permanent policies offer a better value.  (Not to mention dramatically higher commissions for the sales agent)  It is certainly true that permanent policies stay in force for longer, but it is also true that permanent policies involve a dramatically higher cost.  (Typically between 5x and 10x the cost of an equivalent Term policy)  The internal rate of return for whole life insurance policies are frequently in the low single-digits, and the variable policies with investment accounts typically have very high fees.

The end-result is that insurance does a great job of protecting you against a catastrophic risk, but a terrible job of producing a return on investment.  If a person is purchasing a policy for the purpose of estate planning, then a whole life or similar permanent policy may make sense.  However, if the purpose of your insurance is to protect your famaly in the event of your untimely demise, the only time period you need to insure is from now until when you have accumulated enough assets so that your family is still financially secure.  This is a dramatic departure from the rhetoric of most salespeople.  In an attempt to push high-commission products, some have concocted elaborate schemes with attractive monikers such as “bank on yourself” or other slick sounding systems.  In the end, all of these systems ultimately obfuscate the fact you will never earn more from an insurance product than the insurance company earns from your premiums.  (If you did, the company would quickly go out of business)  Because of this, the guiding force behind your insurance decisions should be to protect what you cannot afford to lose against a catastrophic risk, and leave the investing for a different conversation.

Incidentally, one of the primary assets that insurance companies purchase with their premium dollars to earn returns is income producing real estate.  The other main asset category is government and corporate debt obligations.  Thus, it stands to reason that the only returns you can earn from a policy with an insurance company must be the rate of return from these instruments, less the overhead and costs of running the insurance company.  (Which are frequently high)  People who are looking to achieve attractive investment returns should seek direct investment in funds, income producing real estate, and other types of assets and avoiding the ‘middleman’ costs associated with using insurance products as investment vehicles.

 

When most people think of “creating wealth” it conjures up grandiose mental pictures of fabulous riches and exotic celebrities.  However, the term “wealth” simply refers to owning valuable assets.  There is no particular reason why normal, regular people cannot create wealth using nothing more than their current income and intelligent decisions.  The principal barrier to achieving this goal is a mindset many people hold that “It takes money to make money” and that they do not have enough capital to begin making money.  However, there are two problems with this excuse.  The first is that there has never been a time in the history of mankind where it was easier for a person of limited means to create wealth because of technology.  The second is that people who discipline themselves can slowly accumulate capital reserves until they have enough saved up to begin making money.

Let’s begin with the first notion that there has never been a better time to create wealth.  Consider the fact that the internet now allows people of very modest means to acquire the same information as wealthy investment houses.  This technology for information and communication allows investors to find deals, establish relationships with business partners, and manage a portfolio of business and investment interests while living somewhere different from where their business is taking place.  By learning how to leverage the advantages of technology, it can allow you to build a lifetime of scalable wealth.

Now we get to the problem of not having capital for investment.  It is certainly true that some people can simply draw from a trust fund to invest, but most of us need to save before we can invest.  This is where normal people possess true power to influence their financial future.  In the short-term, most of us do not have much influence over our income.  What we earn is more or less, what we earn.  However, we have tremendous influence over how much we spend.  By becoming disciplined and always spending less than we earn, it will result in the perpetual building of capital for investment.  It is important to note that we should spend less than we earn and not earn more than we spend.  The importance of this perspective is that our earnings should rise before our spending does.  Some people spend based on their expectations of future income.  This is a near-certain recipe for excessive debt and financial difficulty.

The way that everyday people can create tremendous wealth is by becoming educated in the fundamentals of business and investment success, spending in a disciplined manner for the purpose of building investment capital, and then prudently investing their capital.  As time goes by, the returns from your investment can be re-invested to continue driving the total value of your wealth upward on a compounding growth trajectory.  Eventually, the growth and income from your business and investment interests will exceed the amount of savings you add each year from living within your means.  When your wealth grows to a sufficient size, it will generate annual returns that exceed your yearly spending.  This is a point that many refer to as ‘financial freedom’ since you have the ability to live from the returns on your investments and no longer need to work at a job for your livelihood.  (You may still choose to work, but it will be a choice and not something that is done out of necessity)

Consider that every wealth legacy started in this fashion.  At some point, there was somebody who made sacrifices to fund investments or build a business.  Their successes were only possible because of the discipline to sacrifice for the sake of future benefit.  In many cases, this has created a wealth legacy that benefited future generations in both their family and the world at large from the many charitable contributions that have come from wealthy families over the years.

There is a great temptation by many people to exclusively look at the symbols of wealth and not the source.  Large homes, flashy cars and trendy clothes are what wealth enable you to purchase, but the fundamental basis of all wealth comes from discipline, sacrifice, intelligent decisions, and prudent investment choices.  By mastering these fundamental principles, you will be able to create a legacy of wealth for yourself and for future generations.  There has never been a better time to create wealth than right now, so take action today and reap the benefits tomorrow.

 

In the American version of Football, there is a ‘system’ known as the “West Coast Offense” that has become a revolution in sports.  Bill Walsh implemented the system as head coach of the San Francisco 49ers in the late 1970′s and went on to win three world championships, with two more achieved using this philosophy after Coach Walsh retired.

Up until Coach Walsh implemented the West Coast offense, there were two competing offensive philosophies that dominated Football.  The first was that of a ‘ball control’ offense where one team would attempt to control the clock by running the football repeatedly.  The effectiveness of this strategy came from the fact that the clock continues to tick after a running play or completed pass, but stops for an incomplete pass.  This means that if a team is large and powerful, it can dictate the pace of the game by controlling the clock and preventing the other team from taking the field.  When paired with a stout defense, ball control can be a highly effective strategy.  The Pittsburgh Steelers exemplified this style of play during the 1970′s.

The second offensive philosophy was a vertical passing or “Air Coryell” offense, named after Don Coryell.  The basis of this philosophy was to have fast receivers positioned near the sidelines and send them on deep passing routes if the defense crowded the line of scrimmage to stop the run.  This style of offense still relied on ‘establishing the run’ to open up deep passing lanes, but made its mark with the ability to produce big plays from long passes.  The Dallas Cowboys of the 1990′s were successful in using an Air Coryell system.

The problem that Bill Walsh sought to solve with the West Coast Offense was one of finding a way to win Football games if you didn’t have a large, physical offensive line and powerful running back required for a ball control offense or the explosive receivers and strong armed quarterback required for a Coryell offense.  The West Coast Offense relied on an intelligent quarterback making quick reads and short passes with precise timing.  By focusing on high percentage passes, it would allow an offense to control the clock by achieving many first downs.  Furthermore, it relied more heavily on disciplined execution from its players than physical prowess.

In this fashion, Coach Walsh changed the paradigm of professional Football from being about who is biggest, strongest and fastest to who is the smartest and most disciplined.  By focusing on quick passing plays, the opposing team had a difficult time tackling the quarterback before the ball was thrown.  By creating plays with multiple passing options, the system was difficult to defend without leaving at least one player open.  By instilling a culture of disciplined execution, the 49ers were able to achieve victory against other teams with more talent.

This philosophy is not only applicable to American Football, but also to your investing career.  There are some people who advocate for a ‘ball control’ strategy of investing that focuses on ‘safe’ investments like CD’s, bonds, and other low risk instruments.  The object of this strategy is to avoid losing.  Like in Football, this strategy requires you to have a large, powerful portfolio in order to produce sufficient cash flow.  Other people advocate a ‘big air’ strategy of investing that focuses on speculative opportunities with the opportunity to produce big gains.  This system requires just the right investments to be executed at just the right time in order to make the big play happen.  If any of the conditions are not right, things can fizzle very quickly.

An alternative strategy for your investing career is to focus on a system of disciplined execution that looks for multiple options and takes the opportunities as they are presented.  People who invest the “West Coast Offense” way will look for the things that are undervalued so that they can capture the opportunities while they are available.  The windows of opportunity will frequently shift, and are not always open for very long.  This system focus on producing steady, reliable gains one decision at a time.  As these gains compound over time, they will march you closer and closer to financial freedom, similar to a football team marching toward the end zone.

The strategy that you choose for creating your financial future will determine what is needed for you to be successful.  Many people are born without wealth, and few have inside information on hot opportunities, but anybody can develop intelligence and discipline.  Which way will you choose?

Champions Pay the Price

One of the great characteristics of Bill Walsh’s teams was the disciplined repetition that they would go through until every aspect of their game plan was executed perfectly.  For key plays, this would frequently mean practicing hundreds or thousands of times so that when game time arrived, the plays could be done without any hesitation or second guessing.

True champions ‘pay the price’ for their success long before the victory is won.  The place where champions really come from is not the game field . . . it is the practice field.  By doing the work and investing the time, champions are completely prepared for game time.  When the time of opportunity comes, they have done the work to perform flawlessly.  This same principle applies to business and investing.  The people who prosper are those who are disciplined and pay the price for success.