The stock market continues to hit all time highs.
Real estate prices have surpassed their 2006 levels.
Cryptocurrencies are all the rage.
Everything is trending up… even Kid Rock’s poll numbers.
On the surface, this might be a good thing (the asset prices, not Kid Rock’s supposed Senate run).
But from an investment perspective, there are not many obvious opportunities.
Instead, investors are up against a lot of “dumb money” that is searching for a home.
“Dumb money” is cash that has been on the sidelines, that is now flooding into investments because, well, everyone else seems to be doing it. Asset prices go up, and more people say, “Hey! That’s going up! My sideline cash can go there now!”
That’s dumb money.
Entrepreneurs are smart, but they tend to be dumb with their money. We can fix that.
On a recent episode of the Freedom Fast Lane podcast, Jonathan Twombly admitted that he’s not buying anything right now because things are too expensive. Finding cash flow is getting more and more difficult.
Finding value on the stock market requires a full time job. And the temptation to buy into something like when the market is surging is – in my opinion – trying to chase a trend in reverse.
So… what should an entrepreneurial investor do? Where does one find cash flow without starting another business?
Are all of the opportunities gone?
And could high prices mean that winter is coming? (I believe the answer is YES to that question, but I’ll save that for another blog post.)
I do believe that right now would be a good time to keep some cash on the sidelines. Be cautious when others are greedy and greed when others are cautious. But keeping cash under a mattress and waiting for winter is an equally bad strategy.
There are still opportunities to put your cash to work. Below, we’ll cover a few of them.
But, first a primer…
What I Look For In Investments
My investment strategy is simple, but thorough:
Step One: create your money in business (this is my active WORK)
Step Two: grow your wealth in long term assets (this is where I invest REGULARLY)
Step Three: expand your cash flow in the short term (where I invest when the opportunity is right)
Inside all three of these, I am looking for tax efficiency so that I can keep as much of what I make as possible. For example, making money in business gives me write-offs, and I want my investments to either grow tax free or to create additional write-offs.
If you do not have a business, then that should probably be your sole focus. I make my money through physical products brands. Some people flip houses. Some people work a 9-to-5. Some people build websites. I believe that physical products brands are the most predictable way to build a seven figure business. But if you’re reading this, then you probably already knew that.
Your best investment is always your business. That should only change, like, once or twice per decade. But where you invest your profits will change from year to year.
Whether you work a job or you are an entrepreneur, I recommend putting a portion of your take-home pay into long-term wealth, and that strategy should only have mild variability (meaning, your strategy should not change very often).
For example, dividend paying stocks are some of my favorite places to invest. I also like whole life insurance. (Disclosure: both are part of my long term strategies.)
Once you have profits, or savings at the end of the year, it needs to go somewhere that will create long term wealth and short term cash flow. Your sources of cash flow provide the most variability, because it is opportunity dependent. In other words, your strategy for cash flow will change depending on if real estate has recently crashed, or if the bond market is hot.
Where you invest for cash flow is what requires the most active management. At the end of the quarter or the end of the year, I analyze where to put my business profits, and it is dependent upon the economy and what the market is doing. In my opinion, this is the only time that you should change your investment strategy.
Where Are The Opportunities Right Now?
At the end of the day, what we desire is predictable cash flow so that we can create lives that excite us. But with the market at all time highs and dumb money pouring into every sector, the opportunities for investors are not obvious. And since entrepreneurs tend to be laser focused on their businesses (as they should be!), they often are late to the party in terms of where to park their profits.
With that in mind, here are three places that I’m actively investing right now:
Cash Flow Source #1: Cash-Flow Funds and Syndications
When times are bad, I buy real estate in the form of single family houses. They provide cash flow, depreciation, and tax-efficient capital gains However, times are very, very good right now. Real estate prices are booming across the country. I have not made an investment into real estate in about a year, because the rents barely cover the expenses.
When times are good, leave investing to the professionals. You aren’t going to beat the full-time investors and flippers right now. My friend J Massey likes to say, “Behind every investment is a business.” So instead of investing into real estate as a “side thing,” invest into businesses that are in real estate FULL TIME.
When times are bad, even amateur investors can find good deals. But when times are good, the small players get eaten up. They see a bunch of people flipping houses or “making a killing in real estate,” but when they get in, it’s a sign that the market has tapped out. That’s happening now. That’s dumb money.
Be hungry when times are bad, and stay out when things are booming. Instead, consider investing into funds that are full-time in real estate. Invest into the business rather than trying to MAKE IT your business. Here’s a high-yield real estate fund that I use (disclosure: we are mutual clients of one another).
Cash Flow Source #2: Good Companies At Good Prices
It is always a good idea to buy good companies at good prices.
I was once having an argument with my friend Tom Kineshanko about Bitcoin. “Bitcoin isn’t backed by anything,” I told him, “so it can crash at anytime.”
He replied: “Name something that is backed by something.”
My answer: “Companies are backed by cash flow.”
Again, every good investment is ultimately an investment in a good business.
When times are good, I look for companies that have been overlooked or beat up by recent news.
A good example of that would be SOME retail stocks; yes, Kohl’s and Best Buy are probably dead, but CostCo, Wal-Mart, and Target (disclosure: I am long on Target and am eyeing a significant entry into CSCO and WMT) are still well run companies that are being overlooked by the media and most investors.
I also like to buy companies at the tail end of bad news. Chipotle’s (CMG) recent scare totally killed their stock price, so I’m chomping at the bit to buy it as soon as the noise settles down. I felt the same way about Volkswagen a year or so ago when their safety concerns were all over the news.
Call me a glutton for punishment, but I love companies with long track records that are weathering temporary storms.
On the other extreme, I buy companies that I personally love that haven’t broken out yet. The first time I flew Southwest Airlines, I plugged in their stock, because I had a great customer experience. I started tracking Amazon when I became a Prime customer. I bought Whole Foods stock when I moved to Austin, TX, and I bought more when the news about the Amazon acquisition came out.
My best advice: buy companies when you like them and sit on them for a long time. Southwest Airlines, Amazon, and Netflix were incredible buys five years ago, and they got big by playing the game well and serving their customers. I currently love (and buy) JetBlue, Whole Foods, and CostCo for the same reasons. Buy companies that do things the right way while everyone else is overlooking them. People tend to spot trends before institutions do, so buy companies that you love while the prices are good.
BUT… the best business that you can invest in is a business that you can IMPACT.
I thought about underlining and italicizing that sentence, but I thought bold was enough. So this is my reminder to go read that sentence again.
When Oprah got equity in Weight Watchers, it soared. Why? Because she could impact it with an endorsement.
When Tim Ferriss invests in Wealthfront, you should pay attention. Why? Because he can impact them with a podcast.
I buy businesses that I can impact, because that is the fastest impact that I can make on my net worth. I bought a company called Foxbrim because of it’s growth on Amazon, an area of expertise for me. It was a good company at a good price, but it was also within my skill set. I can impact it with a few tweaks.
Capitalism.com has an incubator for physical products, and I sometimes invest in our students and members. I know that one introduction can get them into retail stores across the country, so why wouldn’t I invest in them? Entrepreneurial skills are relevant during good economic times and bad ones, so double down where you have an impact.
Cash Flow Source #3: Ads
When times are really good, money often flows OUT of your business rather than into it. When things boom, the temptation is to chase the next rabbit. Or you put that cash into more people or making the office pretty.
But when things are good, THAT is the time to double down on customer acquisition.
Ads are an investment, but most people treat them as an expense.
When the economy crumbles, your list will still open emails. Your book readers will still follow you. Your Instagram following will still check their phones. You will need that “on demand exposure” when your cash flow is tight… so spend the money now to get customers ad followers and to put them onto your email list. Once you own the media… it’s essentially free. You’ll want “free” when winter comes.
If you have money sitting on the sidelines, or you have positive cash flows in your business, dump as much as possible into building up your audience. You will hate it in the short run, but you will thank me in the long run.
One ad has the potential to completely and radically change your business. But the real payoff comes years from now. Attention is long term currency, so when times are good, go buy more media.
A Word On Bitcoin
I am very publicly hard on Bitcoin buyers, because I think that most of them are stupid.
Make no mistake: I am very aware that cryptocurrency might completely change the world. And I understand that we are in the infant stages of something that might be as disruptive as the internet.
But I do not understand cryptocurrencies, and I cannot affect cryptocurrencies. And most of the people who are buying Bitcoin are gambling; they are buying on the hope that it goes up. That is not investing; it is speculating (aka “gambling”).
90% of the time, you should invest in things that you understand and that fall within your skill set. With the other 10%, do whatever you want.
Entrepreneurs tend to invest differently than others. They tend to be risk tolerant and enjoy going against the grain. They tend to look for new trends rather than following old systems. And they value cash flow over anything else. That’s why I developed Investing For Entrepreneurs. It’s a series that will take you through creating more income in your business, generating more wealth, and enjoying more cash flow, all while reducing your tax burden. You’ll earn more, keep more, and make more passively, so that your business operates as a cash flow machine that actually makes your life easier and more fun.