Nov 6, 2012  by Gerald Tay

Years ago before the passing of my late multi-millionaire grandfather, I have had the fortune of frequent conversations and debate on investment and wealth with him. Although I missed him after his passing, his simple teachings had taught me many vital lessons on wealth.

Me: “Do you know your Net-Worth and how much are you worth today?”

Grandfather: “I don’t know and I don’t care.”

Me: “I don’t understand.  Why don’t you care and want to know your Net Worth? Isn’t that what defines you and makes you so rich today? ”

Grandfather: “Young man, how do you grow a healthy apple tree that can produce many juicy apples for you?”

I know my grandfather will always give an anecdote to his teachings.

Me: “You need to first plant the seed and watch it grow.”

Grandfather: “For it to grow, what elements must come first?”

Me:  “Constantly water and fertiliser.”

Grandfather: “Correct. For that apple tree to grow up and produce juicy apples, it needs enough constant water, sunlight, food, besides patience and love.

Me: “I still don’t understand.”

Grandfather: “If you only focus on growing the tree to produce apples for you without ensuring it has enough water, sunlight food, besides passion and love, do you think the tree is able to produce that many juicy apples?”

Me: “No, definitely not.’’

Grandfather: “Exactly. And it’s the same with wealth creation. If you constantly feed your assets with enough Cash flow and patience, your wealth with naturally grow.”

Me: “Now I understand.”

Grandfather: “Besides patience and love, the other vital elements to grow your assets healthily so it can produce enough passive income for you, is to ensure a constant supply of enough Cash flow. Cash flow is the food, sunlight and water. Net-worth is the number of apples you can get from it.

Me: “So, if I focus on ensuring enough food, sunlight and water reaches the tree, the juicy apples will come naturally. If I focus on bringing enough Cash flow for my assets, my wealth and net worth will grow eventually.”

Grandfather: “The reason why I focus on Cash flow and never Net-worth is because your Net worth doesn’t tell you anything, just like the number of apples may not necessarily tell you how healthy your tree is. It’s the Cash flow that will determine your financial wealth and health, and as long as you’ve enough of that coming in every month, you’re financially wealth and healthy.”

Me: “You mean you may have a high Net worth, but you may not be financially wealthy or healthy?”

Grandfather: “Yes.  That’s why the rich always invest on Cash flow, the amateurs on Net worth.”

Me: “Gamblers invest on capital gains. The rich invest on Cash flow.”

Grandfather: “Most of these amateurs think they’re smart to buy and sell on capital gains. It’s called stupidity not investment smart. They ignore good cash flow, and invest on capital gains because they believe their assets will always go up in value. They want to be like the rich and hope to join the rich club. And they would just simply own any investment like a property so it can increase or add to their Net-worth, and they can feel richer.”

Me: “So it’s not Net-worth that determines your wealth. It’s Cash flow. That’s why I remember you said before you never care about how much your home is worth and how much it can sell, because even though it’s sitting on a valuable 22,000 square feet of land, it doesn’t produce any cash flow for you.”

Grandfather: “Exactly!  And it’s not just Cash Flow. Your Cash flow, like food and water, must be more than sufficient for the tree to grow healthily. If you aim to give it the bare minimal, your tree may not survive. And if you cut the water and food completely, the tree will soon wither and die.”

Me: “Your Net-worth will always fluctuate according to the surroundings (Economy). But with enough Cash flow, your wealth (Tree) will continue to grow healthily and your assets (Apples) will also increase or least be safe no matter what happens. Focus on Cash flow, never Net-Worth.

Grandfather: “That’s the reason why I never care and don’t want to know what my Net-worth is. It’s the quality of Cash Flow I am getting in every month from my businesses, properties and other assets that define my wealth today, not the quantity of those assets I own.”

Invest on Quality, Not Quantity. Invest on Cash Flow, Not Net Worth

It is the quality of your income producing assets that will define your wealth, never the quantity.

As an ordinary investor, if you want to be truly wealthy through property or any other investments, it is absolute vital you need to focus on buying on immediate Cash flow, rather than capital gains (Net worth). It sounds too tempting to buy on capital gains, knowing your neighbour or your friend just happen to make a $200,000 profit by selling his or her property.

I know many property investors who boasted how many properties they own and how many fanciful new launches they have bought recently. The big question here is, “What’s the quality of those investments?”

Taking a Smart Risk Vs a Stupid Risk

Lady luck may be smiling on you, for the first or even second time buying on capital gains, but let us be honest. How many times can lady luck be smiling on you for the next few decades of your life investing on capital gains?

All investments carry some risk, but you do have a choice between choosing a smart or a stupid risk. You would not want to ride a bicycle on the road without a protective gear, and neither would you want to start driving your car without an insurance, or try racing your ‘Ferrari’, at a 180 km/hour, and try beating the red light on Bugis Street even in the middle of the night, thinking there will be none or lesser cars.  Maybe for the first few times, you can get lucky, but unfortunately the guy who did just that chose a stupid risk, and this time round, it cost him his life.