How Good Investors Generate Profits No Matter What

How Good Investors Generate Profits No Matter What

Financial intelligence is the solution for turning a bad investor into a good investor

Rich dad said that one of the problems with school is that kids are taught to live in a world of “right” or “wrong.” That isn’t realistic and it isn’t intelligent. In the world of investing—as in real life—there are often more than one answer or solution to questions or problems.

In school there is only one right answer. As teachers grade tests they are looking for right answers.

In school, you are intelligent if your right answers agree with your teacher’s right answers. If your answers agree with the teacher’s answers, you are an “A” student.

The idea of only one right answer is the foundation of academic education.

In real life there is more than one right answer.

For example, when I asked my poor dad what 1+1 equaled his answer was “2.” Rich dad’s answer to that same question was different. His answer was “11.”

This is why one man was poor and the other man rich.

Good investment or good investors?

There are no such things as good or bad investments, just good or bad investors. In other words, the investment is only as good as you are.

This statement from F. Scott Fitzgerald supports the core lessons of this blog:

“The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”

Discussing the two sides of a coin is nothing new. I propose a spin on this and believe that all coins have three sides: heads, tails, and the edge.

According to F. Scott Fitzgerald, the most intelligent people live on the edge, able to see both sides.

Many students leave school believing that only one answer can be right. Rather than open a student’s mind, traditional education closes minds. Kids leave school believing in a world of right or wrong, black or white, smart or stupid. This is the primary reason why so many people do not like school, including many “A” students. If a student never gets to the edge, that vantage point from which they can see both sides, they see only one side of the coin. One answer, one point of view, one perspective.

Financial intelligence is the ability to look at the subject of money from the edge of the coin and see more than one point of view.

Fitzgerald refers to “the ability to hold two opposed ideas in the mind at the same time” as the test of a “first-rate intelligence.” In other words, the idea of right vs. wrong, which is taught in school, is unintelligent. In fact it is ignorant, since right vs. wrong’ ignores, rather than explores, the other side.

In my opinion, the idea of right versus wrong is the basis of all disagreements, arguments, divorce, unhappiness, aggression, violence, and war.

Good investor oil investor

Good investors understand long—and short—positions

The world of finance is full of opposites: income and expenses, assets and liabilities, and bull markets and bear markets. Often, we mistakenly label these opposites around us in terms of good and bad. I love to say: “You don’t have a right hand and a wrong hand, you have a right hand and a left hand.”

To give you a better understanding of what I’m talking about and how it applies to investing, I’ve asked my stock advisor, Andy Tanner, to share his genius.

Andy Tanner

Bill, Jane and the Price of Oil

Let’s look at an example of an investment opportunity we call all relate to that illustrates my point. We have two people: Bill and Jane. Bill has a job that he drives to every day. Like everyone else, he has income and expenses in his life. Far away from where Bill lives, the price of oil increases. He doesn’t know about the forces that push the price of oil higher, but the next day when he goes to the gas station, he sees that the price of gas has gone up. This is a big deal for Bill because a price increase in gas is an additional expense. Through no fault of his own, Bill will need to absorb this cost increase with a reduction in his monthly cash flow.

Now let’s look at Jane’s situation. A few years ago, Jane invested in an oil well. When the price of oil increased for Bill, it also increased for Jane. However, instead of reducing her cash flow, Jane’s monthly checks from the oil well grew bigger, and she didn’t even have to lift a finger.

This single event has two opposing sides. Whether this event (price of oil increase) is good news or bad news depends on your position. Understanding this is very important when it comes to the stock market. People who have a big chunk of their money invested in a plan such as a 401(k) or IRA become sad when the market drops, and happy when the market goes up.

Remember—we want to stop thinking about investments as right or wrong. Instead, we should realize they are simply opposites of each other. When we understand that, we can take advantage of both sides.

We can’t force the markets to move up or down to match our will. But what if there was a way that we could increase our asset column when the market goes down? What if we could position ourselves to profit from a drop in the market?

The Phone of John: The Good Investor

Here’s another example of financial intelligence explained through short and long positions.

A popular mobile phone company will soon be coming out with a brand new phone called the Z9 that millions of people will want to buy. Right now, however, the mobile phone company is selling the Z8 version and people are snapping it up every day for $600.

When John hears about the new phone, he realizes that when the new Z9 model is released, the current Z8 model will become almost obsolete. Even though it currently sells for $600, John thinks it will sell for half of that when the new one arrives.

With this knowledge of the future coupled with his desire to invest without money, let’s consider how John can profit from this scenario. First, John talks to Sally, who has a Z8 phone but no longer needs it. Sally agrees to lend it to John for a few months. John doesn’t pay Sally for it, he simply agrees to give her a Z8 phone in the near future. So, the phone that John borrows now goes into his asset column. But it also goes into his liabilities column, because he still owes it to Sally.

John’s next step is to take that Z8 phone and list it for $600. Within a few days, John has a buyer, and he ships it in exchange for $600. Now in John’s asset column, he no longer has a phone. Instead, he has the $600 he just earned from selling the phone. Over in the liabilities column, he still owes the phone to Sally.

Within a short amount of time, the new Z9 phone is released and the price for the Z8 phone goes down just as John predicted. Now the Z8 is available on eBay for only $300. So, John buys it for $300 and returns the Z8 phone to Sally. Sally is happy because John has fulfilled their agreement, and John made $300 without any initial investment.

If you’d like to learn how to conduct such deals on your own and you’d like Andy to teach you, go here to see his available classes.

Good investor oil investor

The Long and Short of Positions

When we anticipate that the price of something will go up, we want to buy it and own it to benefit when the value increases. But when we anticipate that the price of something will go down, we do not want to own it, we want to borrow it. That puts us in a position to profit when the price drops.

When you look closely at what John did with the phone, you’ll notice that he bought low and sold high. This traditional way of buying low and selling high is called a “long position.” Our example transaction was similar, but because we borrowed, then sold, then bought, and then returned, it becomes a “short position.”

Good investor oil investor

The benefit of short positions is that they give you the power to generate profits no matter what the market situation may be. Traditional wisdom advises us to get out of debt and save money. But as we’ve discussed in this section, it’s not wise to own something if you think it will go down in value. When we know that the value of something will decrease, we don’t want to own it. Instead, we want to borrow it.

Want more Andy? Go here to see his available classes.

Robert Kiyosaki

What Is Intelligence?

Intelligence has many definitions and many meanings. Intelligence, for the purposes of this blog, is simply the ability to get out of the trap of a right-or-wrong world that our schools promote and look at the world of money from as many sides and perspectives, as possible.

The stock market going up is not right or wrong or good or bad. The real estate market crashing is not right or wrong or good or bad.

You, the good investor, are the one that determines the positive or negative nature of your investments. You are in control. If you get educated, you have much more control. If you chose to not get educated and live in a dogmatic “right or wrong” world then your control is turned over to someone else.

As Abraham Maslow described in his Hierarchy of Needs, the fifth level, the highest level of human existence, is the level of Self-Actualization. Self-Actualization is the level at which a person is able to face the world with a “lack of prejudice” and “acceptance of facts.” One such fact might be: there is more than one right answer.

Attaining Self-Actualization as a good investor also means that a person is generous, giving back rather than being a taker. I believe that the reason so many people are greedy is because schools do not prepare people for Maslow’s level two, Safety. When people live in fear, when they do not feel safe, it is human nature to become a taker instead of a giver.

The lesson is: “If your mind is open to opposing ideas, your intelligence will go up. If your mind is closed to opposing ideas, your ignorance is in control.” Intelligence or ignorance? Your ability to keep an open mind and appreciate multiple points of view is a conscious choice. And one that can open your world, and shape your future.

So next time you have an opportunity in front of you, think about what a good investor would do. If you don’t know, it might be time to increase your financial education.

Original publish date: August 10, 2011