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  • Rohit Musale, CFA

How to Become a Smart Investor

Before I answer that question, let us first try to understand, why you should be investing in the first place.

Everybody wants to become an investor.

But most people don't even know, why they are investing in the first place.

If I ask this question to any random person, the most common answer I get is, "I want to invest because I want to make money."

There is nothing wrong with that response.

However, if you want to achieve financial freedom in your life, you must have a very specific reason as to why you are investing.

What is financial freedom?

Financial freedom is when your total monthly passive income either equals or exceeds your total monthly expense.

If you look at all of the content that I create, it is all designed to take you from point A to point B.

Point A is your current financial situation.

Point B is your goal of financial freedom.

If you want to go from point A to point B, you need a vehicle.

What is that vehicle?

That vehicle is called 'investments'.

You have to become a smart investor to go from point A to point B.

Just putting your money in a bank account or a fixed deposit or mutual funds or stocks, is not going to get you to financial freedom.

Anybody can do that.

Who is a smart investor?

A smart investor is an investor who understands that there are only two reasons to invest.

One reason is cashflow.

And the other reason is capital gains.

The smart investor also understands that, when he/she is investing his/her money, his/her first priority is cashflow.

His second priority is capital gains.

If you buy a gold coin, and then after a few months, you sell that gold coin for a profit, that is called as capital gains.

It is not cashflow.

However, if you invest in real estate, or you buy an operating business, and that investment gives you cashflow every single month, while you maintain ownership of that asset, then that is called as cashflow investing.

A smart investor understands the difference between investing for cashflow and investing for capital gains.

I, for example, invest only for cashflow.

I am not even thinking about capital gains.

The only reason why I might invest in things that can give me capital gains, for example, gold and silver is that, in the future, I would like to sell these non-productive assets, raise some cash, so that I can take that cash and invest it in a cash-flowing asset.

Remember, the definition of financial freedom is that your total monthly passive income should either equal or exceed your total monthly expense.

You can only reach point B, if you have passive income.

If you keep buying non-cash-producing assets like gold and silver, you will not have the cashflow.

If you don't have the cashflow, you don't have the passive income to reach your point B.

That's why I say, the only reason why I might invest in a non-cash-producing asset is that, I may want to take the capital gains from that asset in the future and put it in a cash-flowing asset, so that I have enough passive income, that can take care of my monthly expenses, thereby helping me achieve financial freedom in my life.

This is how a smart investor thinks about money, cashflow, and investments.

Another extremely important point that I want you to understand is that, when you invest your money, you are not supposed to invest your money as an individual.

You are supposed to invest your money through a business.

I was reading this book, 'Guide to Investing', written by my mentor, Robert Kiyosaki, and one of the most important lessons that I have learned from Robert, from that book is that, I must always invest through my business.

I must not invest as an individual.

When I am investing as an individual, any income that I earn from that investment becomes my personal income.

As you might know, personal income is the least tax efficient income.

This is the reason why, the richest people in the world invest through their businesses.

The richest people in the world, own nothing but control everything.

Take the example of Warren Buffett.

Most of the wealth of Warren Buffett is tied up in his holding company, Berkshire Hathaway.

And through Berkshire Hathaway, he has invested in several businesses.

If the richest person in the world is investing via his business, I see no reason why you should be investing as an individual.

You must be investing through your business.

In fact, in the book, Robert goes on to say that the only reason why you might want to have a business, is that your business helps you buy your investments in the future.

You as an individual may not be able to buy large investments, but your business, over a period of time, can reach a level where it can buy big investments on your behalf.

It is all about control, it is not about the money.

As long as you control your investment through your business, you are in full control of your cashflow.

In fact, I would further go on to say that, my goal in life is to have a personal income of zero.

Let me repeat that.

I am aiming for zero personal income.

The reason why I say that, is because I am not interested in personal income.

It is the highest taxed income.

Why would I want to earn income, which is the most taxed income?

I am not interested in personal income. I am interested in business income.

I own a business and that business gives me business income.

All of the expenses that I incur, to run that business, can be claimed as a deduction to reduce my business profits.

And as my business profits go down, my tax liability goes down.

And when my tax liability goes down, my cashflow goes up.

As a business owner, I get to use all of the business revenue before paying any taxes.

I have full control over my business.

I have full control over the cashflow.

I have full control over the taxes that I am paying.

That is why I said, it is about control, it is not about the money.

If you want to become a smart investor, you have to remember two things.

First is: you have to invest for cashflow.

Do not invest for capital gains.

Even if you are investing for capital gains, your goal should be to exit that non-cash-producing asset, take the money and put it in a cash-flowing asset, which can give you a passive income, eternally.

The second thing that you need to understand is that, you have to invest through your business entity.

You are not supposed to invest as an individual.

Most people don't understand this simple fact, because they do not have a real financial education.

So if you ask me the question, "Rohit, where should I invest my money?", I would say that, the question itself is wrong.

Because, you are not supposed to invest your money anywhere.

It is your business that is supposed to make your investments on your behalf.

If you understand that, you are well on your way to become a truly smart investor.

Nothing can stop you from completing the journey from point A to point B.


Rohit Musale, CFA

18 December 2022


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