Tuesday, July 13, 2010

Investing for Cash Flow vs. Capital Gain

2008 you bought an apartment directly from a well-known developer. 2010, you sold the apartment and make RM100,000. It was a handsome profit!

2007, you subscribe for a new company IPO (initial public offering). You successfully purchase a few thousand units. 2009, you liquidate all your holding of the shares and make RM50,000 net gain. It was a successful trade!

1st of May, 2009, the domain name Ad.com was sold for the hefty sum of $1.4 million, ranking it among some of the year’s top-selling premium names. Its cost is just a few dollars to the first owner who registered it.

Undoubtedly, you can make a lot of money by flipping – buying something at a lower price and then sell it for a higher price, provided that you can find the willing buyer. This is called “investing for capital gain”.

This breed of investors makes lots of money. But there is another style of investing, besides investing for capital gain.
Different style of investing (not for capital gain)

Case #1
Mr. Tan bought an existing three-storey shop in 2004. The commercial building is rented to a restaurant at the ground floor, an insurance agency on the second floor, and a tuition centre on the third floor. He has a positive cash flow of RM2000 per month and keeps increasing year after year due to rental inflation.

Case #2
John bought a blue chip share during the economy crisis back in 1997. The public company is a manufacturer of daily products and pay handsome dividend annually. John never thought of selling the shares. He is very satisfied with the dividend payment cheque he receives every year.

Case #3
Fannie bought an existing blog in 2008. She changed a couple of things on the website and poured her hard work into marketing it. She is now making a few thousand dollars from the blog every month, even though she had retired from the active role of managing the website by the way of outsourcing.

Now, you can see that these cases are different from the flipping strategy we discussed earlier. Mr. Tan, John and Fannie make money by “investing for cash flow”. Although they do not consider selling their investment possessions, I believe that the value of their investment had increased. The capital gain is just a bonus if they choose to liquidate the investment.
Which investing style do you prefer?

Which style do you prefer? Which style of investing is safer, in your opinion? and WHY?
Tell us in the comment section below. And also please make your vote.


About This Blog

Was established since 20th Rejab 1430.
Just to educate myself.
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