Any successful plan to generate and sustain sufficient wealth must incorporate two very basic rules:
1. Generate Investible Savings.
The first step to unlock the path to building tremendous wealth is not about investing at all.
It is about generating Investable assets.
For most people this begins by terminating any expensive debt such as credit card or high interest debt.
The reason being that expensive debt increases one’s expenses and eats into investable resources.
Second step for most people is redefining certain parts of their remaining income as compulsory payments that must be done.
That payment is, in fact, the first step of savings for investing.
The third step for most people is to invest time and entrepreneurial energy to increase their gross income. Getting a better job, a promotion, a new skill or starting a business that can generate profits disconnected from your immediate personal labor resources.
When the four steps are done, you can start generating sufficient investable assets that can be put to work growing over a minimal period of five years.
When this is done, you can proceed to the next rule.
2. Invest investable savings into exponentially growing assets, growing for many years while limiting the taxes you pay.
Once you generate investable assets and are ready to put them to work, comes the next tough question: Where should I deploy my investable assets to maximize my investment and to generate more wealth?
You should know that any and all investable assets you will ever encounter can belong to one or another of these two categories: Exponentially Growing Assets or Regular Growth Assets.
If you ever hope to generate sufficient wealth from your investable assets, you must learn how to separate your exponential growing assets from your regular growth assets and then make sure you are sufficiently exposed to the exponentially growing asset class.
Exponentially growing assets are a rare creature few understand, even among seasoned investors.
There is a set of strict rules to become eligible for the coveted title:
1. At their very core, they must yield very high returns on internally invested resources and expenses – such as inventory, labor, plant & factory or R&D;
What sets exponentially growing assets apart from any and all investable assets is their ability to make a large profit on a small base of required resources.
The more expenses and investments one needs to make a profit, the less profit is left to increase the value of the asset itself.
2. They must have sufficiently large market opportunities ahead of them to enable many years of sales growth displaying high returns on invested resources;
While many possible assets can generate high rate of return, exponentially growing assets are not a one-off occurrence or limited activity and must be able to maintain their course of growth over many years to build sufficient appreciation for their owners.
3. They must provide extensive internal reinvestment opportunities to use profits at similarly high returns.
To really become an exponentially growing asset capable of building imaginary amounts of wealth, the asset must provide managers the ability to use the rivers of cash generated regularly from the asset in a similar high rate of return.
When these criteria aren’t met, owners soon realize the resulting rivers of profits do not grow at a high rate and the growth in wealth soon slows down due to the ever-growing profits invested in lower rate growing assets.
4. They must be led by honest, high integrity, talented managers, who are actually risking their own wealth alongside their investors.
For these executives, a small increase in the share price will generate much greater wealth than any increase to their paycheck.
Executives of public companies have the ability to loot the company’s coffers or engage in wealth destruction in an infinity of ways.
To avoid that, check to see how large your CEO’s stake in the company stock is before choosing any investment.
As long as the company still embodies the 4 rules that we covered here, you stay invested; this is the one last requirement when investing in exponentially growing assets.
ALL exponentially growing assets see their stock price cut in half several times during the decades, usually due to different parameters that don’t reflect the actual company value.
Holding these assets through turbulences, and even adding to them, requires temperament and familiar understanding of the business, which results in the conviction to stay the course.