After Analysing Warren buffets work, especially in the earlier stages – I found out that there is a KEY strategy he used to create massive wealth that I’ve never seen him or anyone else anywhere ever mention.
Hello my name is gal and If you are curious about learning from warren buffet give this video a Thumbs up – simply click the like button!
So – After I started implementing this strategy last year – 2 things have happened.
- I noticed that all ultra successful entrepreneurs or even mildly financially wealthy people use it in some way or another. They all have businesses that fall into both of the 2 categories I’m going to tell you about in this video. if they only have one business or several businesses that only fall into 1 of these categories they will always have an investment strategy or another way to make up for the lack of the second one.
And if we are talking about making up for the lack of a business, near the end of the video I explain how its possible to use this strategy even if you do not have a business at all – it won’t be nearly as powerful – but its possible.
- The second thing that happened is that Even though my 8 figure business only grew by 30% this year my net worth almost doubled!
And ofcourse I wish I knew that when I just started in business over 10 years ago because I’m sure I would be in an even sweeter spot – but of course this is always the way it is and some things you simply learn later – luckily I still have many years to enjoy this strategy and I’m here to tell you all about it so that you can benefit from it as well!
So what is this strategy and how did so many people who study buffet has missed it?
When most people go and try to learn from warren buffet they just listen to his advice or obsess over his stock picking – in which I’m in no way an expert. But the thing I did learn over the years is that if you want to recreate someone’s success or even just use principles of his success to create your own version of it – you should be more focused on looking at his actions than his words.
Obviously I believe he is a great guy that shares his advice because he really wants to help and I do not think he is hiding anything – but for whatever reason he left this KEY part of the puzzle out.
I will say in advance that even though in my personal opinion owning more than 2 businesses where at least 1 of them fit each category is not just the way warren buffet did it but it’s absolutely the best way to go.
Or at least like other billionaires like Mark Zuckerberg and Jeff Bezos who have different departments in their huge companies again like facebook and amazon that practically act as different individual businesses, at least 1 in each category.
But again It is Partially possible for almost anyone to adopt – even without a business.
So how does it work? Let’s understand the 2 types of businesses And ill give you some examples from both huge companies and small businesses of how they use this strategy to create great wealth for their owners – as well as how I’m doing it myself.
So Let’s start – the 2 different types of businesses you must own to become ultra rich are:
Cashflow generators
And
Cashflow multipliers
The first type are businesses that generate a lot of cash flow even if they are not greatly profitable, and the other type are extremely profitable businesses even if sometimes they create negative cash flow – meaning businesses that know how to use money to create massive growth and profits.
The idea is simple, you have a business that can brings a lot of money in, even if in the end a lot of it has to be used for expenses – in the meanwhile the cash flow can be used to be invested or to be put in the holes for the other businesses, the ones that need a lot of money to run but can be really profitable.
The way I understand Warren Buffet’s story, when he just started he bought companies with some assets that were valued under the value of their assets.
He wasn’t doing it with pizza places but if you want to understand it very simply imagine you knew the pizza place around the corner was losing money and was willing to sell his business for 10K$ just to get out of it.
The numbers here don’t really matter. I just picked an easy number.
Imagine you knowing that the ovens and all the other equipment he had there was worth 15K$ then obviously if you could buy the entire place, close it and sell all the equipment you would be making 5K$ in profits – but you need 10K$ otherwise you cannot do the deal.
To start doing that he got some money from investors but generally speaking this is a type of business that always needs more and more cash, and until a certain percentage of the assets are sold – you won’t necessarily have your money back let alone the profits and this might take some time – in this time, you do not have money.
So very quickly, Warren buffet realised he needed businesses of the first category, the ones that create cash flow – and he started investing and owning insurance agencies and companies.
Insurance agencies and companies usually get a lot of money in advance and would need to return some of it to customers or the parent insurance companies later – in the meanwhile they have cash and that’s a lot of the cash warren buffet used to build his empire by investing and moving that money to businesses of the multipliers type.
Now think for a second about McDonalds – a company selling burgers, which is a business generating cash flow immediately, but as most people know today they have a huge holding of real estate.
Can you imagine them buying so much real estate without selling burgers and fries? Of Course not, they wouldn’t be able to finance it.
Mcdonald’s found a way that many business owners tend to lean into to make up for their lack of business in the cash demanding and multiplying side – and use real estate as the cash demanding business.
And this leads us to many smaller multimillionaires that simply had a business that created cash flow and were smart enough to invest some of it into real estate. An even simpler approach is to invest that money in stocks, something like index funds.
For me right now real estate is like 5% of my net worth and stocks are approximately the same, meaning my businesses are 90% of my net worth – which is a bit out of balance into the risky side but even though I’m married and have 2 kids I’m still young so I’m not over worried about it and i’m also on my way working on it.
So you must be asking, is this any new? What’s the difference between that and me working a job and investing in a 401K or an IRA – and here is a part you absolutely must hear.
When an employee gets a paycheck and puts 10% 20% or even 30% saving and investing, as amazing as it is – it’s not the same.
An employee can only essentially invest the profits, while business owners of the cashflow generator types can invest from the cashflow before profits.
And while if you have a lot of profits or a really big paycheck you can definitely become very wealthy. This strategy doesn’t even require you to make a lot of profits or actually even profits at all to work, and depending on the business it can speed things up like 5 or 10 times faster.
To understand that you must understand how cash flow and profit act differently in businesses. for a basic example is lets say you own a business providing a service – lets say a delivery service.
The client pays when he gets the delivery. Lets say its 5$, when you account for profit you can say that just for example 2.5$ goes to the person who makes the delivery, 1.5$ goes for renting and maintaining the motorcycle, including gas and everything, 0.5$ is for the office and customer service and 0.5$ is profit.
To make 5$ profit you have to do 10 deliveries.
To make 500$ profits you have to do 1000 deliveries.
So If you want to buy 500K$ worth of real estate you have to deliver 1,000,000 deliveries right?
Well, to make 500K$ in profits you do – but not for investing in warrens strategy.
For example, if you have an agreement with the bike renting and maintaining company as well as the gas company that I always pay them for a given month at the end of the next month even though I still make the same 0.5$ profit, I have 2$ in the bank at any given time.
So by the time I make 500K$ in profits and could theoretically buy 1 asset, 500K$ worth of real estate – I can buy – with cash and no loans 4 assets with a total worth of 2M$.
Some businesses are better for doing these cash flow tricks and some are less compatible for it – but the ones that are, will be a great tool in the way to great wealth.
Warren buffet mostly used insurance companies and now he has a very rich portfolio of companies of this type. Mcdonalds sold burgers and others use different businesses and methods.
Now if you think the last example was amazing you only saw like 50% of the power of the genius warren buffett strategy. Because investing in real estate, again, as amazing as it can be – creates a slow down in the system as it makes a lot of money stuck in the investment for a long time.
Now imagine using this exact strategy, even with the simple delivery company example just that instead of investing in real estate you would do a deal with a shorter life cycle – the simplest example most people are familiar with is flipping.
Flipping means you buy something for a low price, maybe you add some value to it, sometimes not than you sell it again for higher prices – people do it with real estate, with goods or products or even businesses.
These deals can be incredibly profitable – but they require that you have cash to get the things in the first place or at least in order to add the value and pay for the costs of the deal.
So if your delivery company which only made 2500$ but as with our example has 10000$ in the bank bought the pizza place with the 10,000$ it could easily finance it and make another 5000$ which means tripling the profits!
The beauty is that now the company has 15,000$ in the bank and so you can now get into a bigger and bigger deal.
Facebook is a cash flow generator and they buy other businesses with their money, it’s not just the huge deals you see like acquiring whatsapp or instagram – they are doing more of the smaller scale deals than you can imagine.
Amazon is another example of a company that has departments that are cash flow generative and others that require huge investments before they create profits.
Even in small businesses there are some companies who simply always need more money and the more money they have the more money they can make. Examples could be companies that need to hold massive stock and want a new product line. Every time a business like this wants to grow – it lacks money.
On the other hand, other businesses like an online marketing agency or a financial services company might never need money to grow, because it can always get money first and pay expenses later.
In 2016, a year and a half after I sold my 50% in a 7-figure company I co-founded to my ex-business partner, I started the company that now makes up around 50% of my net worth and while the profitability is nice, the cash flow streams it produces allow me to invest in other businesses and financially grow in a faster rate than I could hope for.
I went to study warren buffet because i realised I wanted to make a lot of money but even though i really love my business and I believe I did something really good by starting it and growing it, the more it grew the lower the profit margins became – but I was sure there was a way to leverage what I have built in a more powerful financial way.
Of course, in the most basic sense, a job can provide cash flow, and real estate or index funds can drain that money and create growth.
But utilizing the power of a cash flow generating business, with a bit of higher level cash flow management practices combined with a high investment high profit businesses – is another story completely.
And if the businesses have things in common or they can mutually benefit each other you are on the right track to grow incredible wealth.
