One of the big stories from September involved the sovereign fund of Norway. During the month of September the fund’s assets passed a trillion dollars in value. The root of all this wealth… oil. Norway has wisely used black gold as a cash generating asset to build its portfolio. The lessons that responsible governments can learn from this behavior are enormous. For individual investors on their quest for financial independence, the consequences of learning are life changing.
Owning a Cash Generating Asset as an Investor
The old adage that cash is king rings true today. Cash gives you the flexibility to spend, invest, or donate. Want to buy a car? You will need cash for that. If you want to acquire shares of undervalued shares of stocks, you will need money for that. If you have cash reserves, you can survive losing a job while you figure things out. Several celebrated investors such as Warren Buffett have described periods in their lives when they were asset rich but cash poor, and the first world problems that entails. For pretty much every individual out there, having a cash generating asset is necessary to become financially independent.
In pretty much every major economy, a job is the primary generator. The general setup of approximately every industrialized nation is then setting up a system where private citizens turn a portion of their work earnings into a portfolio that can support them in retirement. In the US our 401ks and IRAs serve this purpose. For those who want to have extra security outside of those vehicles, it becomes important to look at certain places to invest.
Real Estate, private equity, bonds, and on occasion, some stocks are typically the go-to for cash. Continuing with the theme of oil, if you can buy blocks of the oil majors during oil crashes when they are sustainably yielding 8% plus, that can be a great way to buy cash. Real estate, outside of certain circumstances, yield around 10%. If you buy a million dollar apartment building without debt, you just tacked on $100,000 to your income sheet.
Think Outside the Box when You Need to
Cash generating assets don’t need to be confined to the traditional asset classes. In today’s economy, there are a ton of ways to make money. Look at adventurers like Fiona Ayerst who make money taking pictures of underwater wildlife. When I have gone diving down in Mexico, there were a few divers carrying $16,000 camera set-ups because they made money from the pictures and videos they took through licensing and advertising deals. Making money is a lot easier when you are passionate about what you are doing. These folks, instead of buying real estate or MLPs, generated cash through taking pictures. Other artists like Taylor Swift and Beyoncé make millions off of the copyrights for their songs.
Once you Have a Cash Generating Asset, Life gets a lot Easier
Whether it is a massive block of Royal Dutch Shell stock or a hotel building in the Midwest, the cash those assets send you can be used by you for financial independence. If you want to go fishing in Canada with your friends, you can keep your mind on which lure to use rather than worrying about how you will keep the heat on during the winter. You can start your own food pantry. The limits are your imagination. The hard part is saving money from your job, and being smart about transforming it into passive income. Read a little bit every day, use your skills and insights to your advantage, and take your best swing at the best risk adjusted opportunity that life occasionally throws.