Let’s directly jump to the principles in detail.
Principle #1: Investors never spend the principal.
Most of the investors understand this fundamental principle. It is the origin of capitalism. It is great divide between the 1%. I would tell you the one phrase that could be a key to wealth preservation.
That is ‘do not ever spend the principal’.
If you obey this principle, you and your children, next and next generation will be financially stable till end of the life. This concept is not easy to understand by new investors. This goes over the head. Let’s jump into the details of do not spend principal.
When you invest a dollar just think it has gone and never come back. You now cannot use it. You are not able to buy anything or you cannot pay any debt from that dollar. This is no more in your life. That dollar has gone in a process that generate returns for you forever.
I am showing you an example through which you can clearly understand the meaning of do not spend principal.
I have a total sum of $200,000. I buy a rental property with the whole amount. The property gives me $2,000 per month. After a year my property value gets appreciated and the worth now is $220,000. I have total of now $244,000. I sell the property and walks to bank. Now I have $244,000 in my account. I earn $24,000 from rent and $20,000 from appreciation value.A total gain is $44,000 or 22% ROI. The $200,000 of that money in the bank is the principal. I used to invest in the first hand.I can spend $44,000 that I have earned without touching the principal amount.
Principle #2: Investors should reinvest most of the return amount.
Investors should also understand this fundamental principle to the core. I can also say this the origin of true wealth. The great division of the 0.01%.
The phrase I will use here is:
Principal and majority of return on investment both should reinvest.
If you obey this principle the same would happen to your generations and generations. The fruit will be sweet and big for the life.
If you want to build up wealth then you cannot spend all of the return you get from your investments. Instead, you need to reinvestsome portion of the return you get.
The example I gave in the first principle think again of it. You have earned total of $44,000 do not spend whole amount. Half of the return should be reinvested. Buy new property of $222,000 and it will give you more return with appreciation value. Do it every year and earn more return on investment. The more you invest the more you gain. Make this habit of investment. That will give you a faster growth in your income.
The core thing for investing is to build your wealth and enhance the life style. So, you can enjoy the luxury life but be careful do not use principal amount in the over joy.
Principle #3: For investment you should have capital.
When you think about investment you must have capital. You have capital in only two situations one you earn it or the second is you inherit it.This is the reason there is such a great divide in wealth in America. Instead of the fact that America has a relatively low cost of living.
If you want to be potentially strong in wealth and want to gain financial freedom then do not spend what you earn. The amount you have earned that would be your investment. Do not go with the other’s money. If you are a real entrepreneur or want to be a successful businessman than do not seek people’s money. You have to do on your own. The capital must be yours. And you have to earn your capital.
Principle #4: Investment returns do not correlate with effortsalways.
A person who invest all his efforts in finding the right opportunity for investing. His is using his potential energy for market study and undervalued stocks. He is using all his right behavior but his all efforts are in vain Unfortunately. He can use his potential simply in investing index fund and can earn better long-term returns. So, the key is think smart and gather your all efforts for acquiring high return on investment.
Too many amateur investors attempt to pick stocks and beat the experts in public markets. It clearly shows that there is no correlation between their efforts and their returns.
Principle #5: Return on Investment are strongly affected by knowledge.
The most interesting thing is the folks usually pick stocks because they are ignorant of the investment.They do not possess the knowledge regarding math and philosophy of investment. Most of the successful investors suggest do not get into picking stock. That is their lack of knowledge that leads to valueless efforts. Knowledge can be powerful and it leads us in long term financial positions and high return on investment. Just the thing is,apply correctly the knowledge to the business over which we have some control.
Let me give you my example. I have knowledge in Denver real estate market and real estate investing fundamentals. Then it is easy for me to gain high return on the investment. So, this knowledge could not help me in getting high return on stocks.
Without knowledge many of you can go wrong for investing and building businesses. And the problem is that it will not only reduce your return but can destroy the principal you have invested.
Principle #6: Investors do not confuse rapid change with risk.
First thing is to understand the definition of risk. The folks who says that investment in stock is risky they are wrong. They do not know the exact definition of risk. So, stocks are a group which are volatile. Bonds as a group are less volatile.This is the important distinction that investors should understand. See stocks are less volatile so they are less risky while bonds are riskier because they are more volatile.
Principle #7: The best investments could be specific to the investor’s personal situation.
Most of the people, fails to understand that great investment does not return from typically investment, stock market, bond market or rental investment. In spite of this, the greatest investment is reducing your cash out flows. In spite of that reducing your personal expenses is the greatest investment. Reduce your cash out flow that will give you increase in wealth and return on investment.
Cut down your personal expenses. Use energy savors instead of LED light. That will cut down your expense on utility bills. Reduce some cost of the fuel and try to get save more. This is the best way for cutting down your expense and making high income. If you did not try this yet. Then go with this option first.