Rich Dad teaches us that without rules in our lives, chaos results. Just imagine if there were no speed limits on our highways, more deaths would result. We teach our children to be polite and respectful. To treat others they way they would want to be treated. All because we know that’ll make this often chaotic life a little easier for them.
Well when it comes to investing, it’s no different. We must have rules. I’m not a very religious person, but I consider myself very spiritual. And one of the famous sets of rules most of us are familiar with are The Ten Commandments. Starting with, “thou sha’ll not kill.”
In the case of investing money, the idea rule is when you invest it, do your best not to kill it. Truthfully, like The Ten Commandments, it’s more to be used as a guideline as oppose to steadfast rule, to keep us and your money safe.
There is a rule called the “Pareto principle,” known as the 80/20 rule. Which says that “eighty percent of what happens comes from only twenty-percent of one’s efforts. For example. If I invested in one hundred units of eCommerce inventory, only about twenty-percent of that inventory will create profits.
That being the case. I want to share with you my 20/80 secret rule when it comes to successfully investing in eCommerce inventory, or in any other type of investment. Always do your best to make sure you are only exposed to twenty-percent of the risk.
I mentioned in my last post, that my eCommerce advisor invests a whopping $400, 000 in inventory on credit, each and every month, but only makes a profit of about twenty-percent. Eighty-thousand to be exact. His investment strategy violates Pareto’s rule, exposing him to too much risk. Because only twenty-percent of the $400,00 is his profit. If he followed the rule. He would only be investing $80,000 which is twenty-percent of $400,000, and would be generating $320,000 per month in profits, which is eighty percent of the $400,000.
In my opinion that’s a very risky strategy to use. Here’s the main reason why. There’s little room left for error. Most businesses that rely heavily on debt like this get wiped out when the economy begins to slow. Because the economy only thrives when people feel optimistic and confident, cause that’s when we spend the most. So when we have no confidence, our spending tightens. Banks react to this by tightening their lending.
Therefore, it becomes hard for small businesses to borrow money via credit to purchase inventory to sell. So there profits begin to shrink, adding the insult of conservative consumer spending to the injury of there poor profits from being unable to purchase enough inventory. Supply becomes more than the demand.
Now granted, to get while the getting’s good by making eighty grand per month can be a beautiful thing. But as you know, Rich Dad or myself are not about teaching you how to think like an average entrepreneur or investor. We teach you to think sophisticated.
So here’s my 20/80 secret rule. Turn the investment inventory odds in your favor. How much better would it be for my advisor, if he followed my 20/80 rule? By only investing $80,000 per month, to profit $320,000 per month? Obviously, a whole lot better.
Practicing my 20/80 rule would do three important things for you:
- Accelerate your profits
- Provide you with maximum reinvestment capital
- Most importantly, expose you to as little risk as possible, so that you would survive and thrive in a good or bad economy.
Mind you, you would also be flush with cash to acquire great assets that come to the surface in a bad economy. I know, as the saying goes, “easier said than done.” I couldn’t agree more. So use this 20/80 rule as more of a guideline, as oppose to a hard-lined rule.
But it’s possible. Because in my eCommerce business, for every $200 I invest in inventory, it produces about $1,000 in net profits. Giving me great profit margins that protect me against unforeseen costs, which Amazon, eBay and others are infamous for.
Well there you have it, my 20/80 investment rule. If you have a dollar to purchase inventory. Only invest .20 of it to make a minimum of 80% profit and watch your profits soar. My average pure cash net profits are currently at $35 per item sold and climbing. That’s how a sophisticated investor approaches investing. Which requires a lot of research, study, discipline and patience.
This is why, Warren Buffett say’s, “if you can’t control your emotions, you can’t control your money.” Average investors live for the money. Sophisticated investors live for creating great investments.
But, I won’t lie to you. It takes a lot of creative thinking. Something I teach the people I work with to do. Work on doing more and more, with less and less. Not to be fooled and distracted by hearing big numbers. Because it’s never about how much money you make, it’s about how much of the money you keep.
My 20/80 rule is an elephant you have to eat, one bite at a time.