- How do I become financially independent?
- How do I design the life that I want?
- How do I compound the money to build great wealth?
Each riddle builds upon the previous. Once you have figured out how to become financially independent, you are now ready to move onto the life of your dreams. Once you have built the life of your dreams, it is time to move your scope back to the money game and ask, “how can I compound my wealth so that it grows to enormous proportions.” A person asking this question will be a person who does not truly want to blow his or her fortune and is concerned with growing a great amount of wealth that they can potentially pass on to future generations.
I would look towards these areas to answer the compounding question:
- Buffettology
- Compounding Your Covered Call Income
- Reinvesting Your Rental Earnings Into New Property
- Reinvesting Your Business Income to Expand Operations at a High ROE
Buffettology
Bottom line, Warren leaves the money stay put to compound since the fundamental, underlying business consumer monopoly will continue to be a good investment unless the underlying economic, fundamentals change. This also allows him to avoid capital gains tax consequences allowing the money to compound unhindered by tax consequences. Warren buys businesses with strong, increasing earnings that are able to reinvest those earnings at high rates of return on equity.
Remember, Warren’s cash flow picture looks like this:
Warren leaves the money in the investment so that it may continue to compound. Even the companies he invests in reinvest their earnings to compound the value of the company. This is how Warren Buffett turned a $105,000 investment into over $40 billion over the course of 50 years. If you want to use this method to generate cash flow, you must make capital gains withdrawals as the stock value grows. If you truly want to compound your earnings, this is the territory of compounding within compounding.
Compounding Your Covered Call Income
If you are truly generating returns in excess of 40% a year using the covered call technique, then you also have the ability to compound this money at the same, high rate of return. Where Warren Buffett gets cozy with a consumer monopoly type company and invests for the long haul, this method is a technical investing strategy that is a cash flow engine. Still, at the same time, you can reinvest those cash flows into additional stocks and compound your asset value. At near 50% rates of return, you should be able to compound into a tidy sum of wealth in a relatively short period of time.
Reinvesting Your Rental Earnings Into New Property
If those rental checks coming in far exceed your bill paying needs, then perhaps it is time to reinvest those earnings by using them as a down payment on a new piece of property. Just as Warren Buffett does and just how we compute our rate of return in our covered call investments, we must also evaluate a rental property in terms of the rate of return we will receive. Again, if you find a four-plex that yields a 15% rate of return and another that yields 25%, all things equal, you should select the 25% yielder for investment purposes. Always have the ability to do a cash flow projection for your property and be able to compute the rate of return or Return on Equity. By investing in new property, you can compound your earnings through the appreciation of the property and the increase in cash flow.
Reinvesting Your Business Income to Expand Operations at a High ROE
Just as Warren Buffett does, if you own a business instead of blowing your earnings on a bunch of toys or a new car, you can take those earnings and reinvest them in business expansion as long as you currently have a high rate of return, have the ability to maintain it and have the ability to expand into new, high rate of return ventures.
Example: Your business is a hamburger stand and you have the opportunity to open a second location across town. You currently generate a consistent $10,000 a year in earnings on a $50,000 investment for a rate of return of 20%. The new, smaller location, you forecast will be able to generate $5,000 a year on a $25,000 investment which will maintain the 20% rate of return. Thus, you see this as a good opportunity and choose to use the company’s earnings as the down payment on the business expansion.
__________________________________________________________________________________
Posts
No comments:
Post a Comment