10 Investor Controls Every Investor Must Have
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| 10 Investor Controls Every Investor Must Have |
To become a sophisticated investor, you need to understands each of the ten investor controls. It is important to understand that a sophisticated investor may choose not to become an inside investor or ultimate investor; rather, he or she understands the benefits of each control. The more controls these investors possess, the less risk they have in the investment.
This article takes you through each investor control so you get a better understanding of how a sophisticated investor thinks.
1. The Control over Yourself
The most important control you must have as an investor is control over yourself as it can determine your success as an investor. It is important to note that, it isn’t the investment that is risky, but rather it is the investor who is risky.
Most of us were taught in school to become employees. There was only one right answer, and making mistakes was horrible. In school, we were not taught financial literacy. It takes a lot of work and time to change your thinking and to become financially literate.
A sophisticated investor knows that there are multiple right answers, that the best learning comes through making mistakes, and that financial literacy is essential to be successful. They know their own financial statement, and they understand how each financial decision they make will ultimately impact their financial statement.
Always keep it in mind that, to become rich, you must teach yourself to think like a rich person.
2. The Control over Income/Expense and Asset/Liability Ratios
This control is developed through financial literacy. There are three cash flow patterns--the cash flow pattern of the poor, middle class, and the rich. You need to decide at an early stage the cash flow pattern of a rich person.
The cash flow pattern of the poor: The poor spend every penny they make--they have no assets and no debt.
The cash flow pattern of the middle class: Individuals in the middle class accumulate more debt as they become more successful. A pay raise qualifies them to borrow more money from the bank so they can buy personal items like bigger cars, vacation homes, boats, and motor homes. Their wage income comes in and is spent on current expenses and then on paying off this personal debt. As their income increases, so does their personal debt.
The cash flow pattern of the rich: The rich have their assets work for them. They have gained control over their expenses and focus on acquiring or building assets. Their businesses pay most of their expenses, and they have few, if any, personal liabilities. Sophisticated investors buy assets that put money in their pockets. It is just that simple.
2. The Control over Income/Expense and Asset/Liability Ratios
This control is developed through financial literacy. There are three cash flow patterns--the cash flow pattern of the poor, middle class, and the rich. You need to decide at an early stage the cash flow pattern of a rich person.
The cash flow pattern of the poor: The poor spend every penny they make--they have no assets and no debt.
The cash flow pattern of the middle class: Individuals in the middle class accumulate more debt as they become more successful. A pay raise qualifies them to borrow more money from the bank so they can buy personal items like bigger cars, vacation homes, boats, and motor homes. Their wage income comes in and is spent on current expenses and then on paying off this personal debt. As their income increases, so does their personal debt.
The cash flow pattern of the rich: The rich have their assets work for them. They have gained control over their expenses and focus on acquiring or building assets. Their businesses pay most of their expenses, and they have few, if any, personal liabilities. Sophisticated investors buy assets that put money in their pockets. It is just that simple.
You may have a cash flow pattern that is a combination of these three types. What story does your financial statement tell? Are you in control of your expenses?
3. The Control over the Management of the Investment
3. The Control over the Management of the Investment
An inside investor who owns enough of an interest in the investment whereby he or she can control the management decisions has this investor control. It can be as a sole owner or where the investor owns enough of an interest that he or she is involved in the decision-making process. The skills learned through building a successful business are essential to this investor.
Once the investor possesses these skills, he or she is better able to analyze the effectiveness of the management of other potential investments. If the management appears competent and successful, the investor is more comfortable investing funds.
4. The Control over Taxes
The sophisticated investor has learned about the tax laws, either through formal study or by asking questions and listening to good advisors.
Sophisticated investors uses tax advantages acquired from being investors and business owners thoughtfully to minimize their taxes paid as well as to increase tax deferrals wherever possible. Most often, they enjoy many tax advantages that are not available to other people.
There are three specific advantages being enjoyed and they are:
i. Social insurance taxes do not apply to passive and portfolio income but do apply to earned income.
ii. It may be possible to defer payment of taxes, perhaps indefinitely, by using the laws available to you related to real estate and owning a company (an example would be a profit-sharing plan sponsored by your business corporation).
iii. Corporations may pay for a number of expenditures with pre-tax income that Employee income recipients must pay for with after-tax income.
Sophisticated investors recognize that each country, state, and province has difference tax laws, and they are prepared to move their business affairs to the place best suited for what they are doing.
Recognizing that taxes are the largest expense for Employees and Self-employed, sophisticated investors may well seek to reduce their income in order to reduce income taxes while increasing
funds for investment simultaneously.
5. The Control over When You Buy and When You Sell
The sophisticated investor knows how to make money in an up market as well as in a down market. In building a business, the sophisticated investor has great patience. This is sometimes referred to as “delayed gratification.”
5. The Control over When You Buy and When You Sell
The sophisticated investor knows how to make money in an up market as well as in a down market. In building a business, the sophisticated investor has great patience. This is sometimes referred to as “delayed gratification.”
A sophisticated investor understands that the true financial reward is after the investment, or business, becomes profitable and can be sold or taken public.
6. The Control over Brokerage Transactions
6. The Control over Brokerage Transactions
The sophisticated investor operating as an inside investor can direct how the investment is sold or expanded. As an outside investor in other companies, the sophisticated investor carefully tracks the performance of his or her investments and directs his or her broker to buy or sell.
Many investors today rely on their brokers to know when to buy and sell. These investors are not sophisticated.
7. The Control over the E-T-C (Entity, Timing, Characteristics)
7. The Control over the E-T-C (Entity, Timing, Characteristics)
Next to control over yourself, the control over the E-T-C is the most important control. To have control over the entity, timing, and characteristics of your income, you need to understand corporate, security, and tax law.
Sophisticated Investors truly understand the benefits offered through choosing the right entity, with the right year-end, and converting as much earned income into passive and portfolio income as possible. This, combined with the ability to read financial statements and “think in terms of financial statements,” helped this investors build their financial empire more quickly.
8. The Control over the Terms and Conditions of the Agreements
Sophisticated Investors truly understand the benefits offered through choosing the right entity, with the right year-end, and converting as much earned income into passive and portfolio income as possible. This, combined with the ability to read financial statements and “think in terms of financial statements,” helped this investors build their financial empire more quickly.
8. The Control over the Terms and Conditions of the Agreements
The sophisticated investor is in control over the terms and conditions of agreements when he or she is on the inside of the investment. It is critical that you understand the terms and conditions of any investment.
While legal advice is of paramount importance to ensure that any contract of investment is above board, you still need to know what is being asked of you so that you can decide whether such stipulations are acceptable or not.
Furthermore, showing that you have knowledge of such things will generate more confidence in you as an investor or a startup businessperson during negotiations.
9. The Control over Access to Information
9. The Control over Access to Information
As an inside investor, the sophisticated investor again has control over access to information. This is where the investor needs to understand the legal requirements of insiders imposed by the Securities and Exchange Commission.
10. The Control over Giving It Back, Philanthropy, Redistribution of Wealth
The sophisticated investor recognizes the social responsibility that comes with wealth and gives back to society. This may be through charitable giving and philanthropy. Some of it will be through capitalism, by creating jobs and expanding the economy.
10. The Control over Giving It Back, Philanthropy, Redistribution of Wealth
The sophisticated investor recognizes the social responsibility that comes with wealth and gives back to society. This may be through charitable giving and philanthropy. Some of it will be through capitalism, by creating jobs and expanding the economy.
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