Are you a Cattle Rancher or a Dairy Farmer?

My favorite time frame for holding a stock is forever.
– Warren Buffet

I’ve just finished the book “Who took my money: Why slow investors lose and fast money wins!” by Robert Kiyosaki & Sharon L. Lechter. In one of the chapters, he gave an analogy of the cattle rancher versus the dairy farmer which was pretty interesting, so I thought I’ll share it here.

Both the Cattle Rancher and the Dairy Farmer deal with the same asset – the cow. However, while the former slaughters it and sells it for meat, the latter milks them and sell it’s product. This illustrates the difference between ‘Capital Gain‘ versus ‘Cash Flow‘ – you can only sell a cattle once for meat and make a huge profit (capital gain), whereas if you sell it’s milk, you can sell it for many years to come, though at a much lower initial profit (cash flow).

You can tell which a person is after by the way he talks:

Capital Gain Investor:
– “My net worth has gone up.”
– “My home has appreciated in value.”
– “I paid $10 a share, the price went to $15 and I sold.”
– “I bought a house, fixed it up, sold it, and made $23,000.”
– “The company’s earnings are up so I expect the share price to follow.”

Cash Flow Investor:
– “What is my cash-on-cash return from the property?”
– “The stock is paying a 56 cent-per-share dividend.”
– “It is a tax-free municipal bond aying 7% interest.”
– “I receive a 16% interest from my tax lien certificate.”

Most of us have a mixture of investments, some with the intentions of capital gains, while others solely for cash flow. It is very important to know which investment falls under which category.

Market cycles go up and down. If you are in it for Capital Gains, you need to know when you need to sell. If you are unsure and hesitate, you could end up losing money instead. Likewise, if you are in it for cash flow, even if your stock value goes up, you shouldn’t confuse it for a ‘capital gain investment’ and feel tempted to sell. By selling and making a small profit, you might lose out more from the cash flow it could have given you down the years.

After reading this, it made me re-examine my current investments and categorize them correctly. I am holding stocks for dividend yields, but I too did have thoughts of selling them when the market recovered. As such, I might have confused myself about the intentions I have for the investment.

The next time you invest, ask yourself:

Are you a cattle rancher or a dairy farmer?

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