How to Compare Any Investments

Should I invest in Bitcoin? That's a question I've been hearing a lot. Let’s find out if it is by comparing investments of different classes using cash on cash return. There are several methods available and this is just one of many different methods that you can use to actually do that comparison. However, this is one of the most well-known ones and most used. Another option would be to utilize the internal rate of return.

The simplest example is Your Checking Account. When you put your money in the bank, you get a 1% interest. So, if you deposited a thousand dollars and you get $10 a year.

Whenever we’re doing cash-on-cash returns, we have to always annualize the percentage rate. It all boils down to a percentage. Don't look at the dollar amounts, always get to the annual interest rate.

Basically, $10 of interest that's paid a year divided by the thousand dollars that we deposited equals 1%. This is our annualized cash-on-cash return. The $10 represents the annual cash flow, while the $1,000 represents the investment.

Another asset class that people invest in is stocks. Investing in stocks is a little different when you're trying to get that cash-on-cash return because there's a lot of factors that go into it.

On the other hand, in real estate, when we're trying to figure out the cash-on-cash return, what you want to do is figure out if you were to rent the place, how much you can rent it for, minus all the expenses, minus the capital expenditure that you need to reinvest overtime to keep the property in good shape. The leftover amount is your cash flow.

The cash flow in one year is divided by how much you invested into the property, that's going to be your cash-on-cash return.

So, let's say we can rent a place for $1,500. We have principal and interest of a thousand dollars. So we're at $250 of cash flow per month on this thing. Over a year, that's going to be $3000 a year. Let's say we put $30,000 down on this deal.

3000 divided by 30 leaves us with an annual return of 10%.

Now, if I have $30,000 to deploy, which do you think is a better investment? Should I put it into real estate, or into a Checking Account?

It really depends on your risk tolerance. There's a reason why one makes more than the other because there are risks involved.

In real estate, you can potentially lose all your money, and it’s the same with other investments like stocks.

I am a believer in what Benjamin Graham and Warren Buffet do, which is called Value Investing. What they look at is the free cash flows of a business. They annualize that into perpetuity and they come up with a number to determine the intrinsic value of the business. And, if that total number is more than what the business is selling for on the open market, they buy it.

That is also how they do their analysis on stocks. Now, in comparison to real estate or a checking account, in stocks, the bulk of the growth is, primarily, appreciation.

We have to check the performance historically of how well a stock did appreciating and then we factor in the dividends that it paid. On an annual basis, we need to examine: how much dividends did it pay, how much did it go up. Once that’s determined, we divide it by our initial investment to get the annualized rate.

This is one of the reasons why I don't invest a lot of my money in stocks. It is because it's so appreciation-heavy, and it is most of the time controlled by the market in general.

Another asset class that people do is businesses. This is going to be very similar to how Warren Buffet analyzes his stocks. You will need to figure out what the free cash flows are.

That's basically how much business brings in, minus the expenses, minus the amount necessary that you need to reinvest into the business to keep it growing, to keep it functioning into perpetuity, and then that leftover amount is your free cash flows. The re-investment process is very similar to Capital Expenditure.

Moreover, the free cash flow that you come up with on your annualized basis, divided by your initial investment, is your cash-on-cash return.

In real estate or any other business, you have to reinvest money into the asset itself to keep it going. It is one of its similarities.

So, to answer the question I posed earlier, should we invest in Bitcoin?

It'd be hard to say yes immediately because there’s a lot that goes into it. Cryptocurrency doesn't have any intrinsic value in it and it doesn't generate any kind of cash flow for us to analyze. It's all based on appreciation. It's something that's really hard to analyze.

It's more of a speculative asset that you're putting your money into. I'm reluctant to even call it an investment, even though I've dabbled in it and I've put some money in it, but it's purely for speculative reasons.

However, if we're talking about a significant portion of my portfolio, I probably wouldn't put a lot of money into it.

Furthermore, with all that considered, the thing you want to keep in mind is there are reasons why certain investments garner greater returns. It is because the risk associated with it is greater.

Everything except for FDIC-insured checking accounts or savings accounts, you could potentially lose all your money. It's unlikely, but it can happen. Stocks are a little safer, as long as you don't use leverage.

In real estate, you need to be careful not to over-leverage because you can wipe out a significant portfolio in a quick amount of time. There are certainly serious risks involved.

But as long as you can get the annual cash flow of assets and you know how much you're investing in it, you can come up with what the cash-on-cash returns are, you should be able to compare which investment opportunity for you is better.

Want to watch the video: CLICK HERE