In 1996 I was in the room with some of the brightest investors of our time.
They batted around terms and strategies that left my head spinning and my hand sore from writing down as many notes as possible.
I distinctly remember, just before ending the day, someone (not me) made a comment that brought everything to an abrupt halt.
“If I buy a note that pays for 10 years at 12%, I don’t have to worry about investing again for another 10 years.”
What got me was the number of people that agreed. Buy a cash flow note, collect payments for 10 years – THEN buy another note and enjoy another 10 years at 12% (or whatever)???!!!
Surely these people knew the math?
Well, some did, but several did not. Here is what I told them…
You don’t get 12% for the entire ten years. Actually, if you don’t reinvest the money, you will only earn around 5.45% (per the example we were using). Here is the math.
9% Face Rate
Think of the purchase as 120 mini buys. Each time you receive a payment, you have been paid in full for that specific segment. If you just stuff the money in your mattress, the clock stops ticking.
Here is what it looks like if you do nothing with the payments each month for 10 years.
N I/yr PV PMT FV
120 payments 5.45%——–$34,850.26 0 $60,0000
You MUST reinvest to maintain the yield you think you are getting – especially when buying a cash flow that pays back incrementally.
Needless to say, a few left the meeting scratching their heads while others were ready to reinvest right away. On the plus side, I didn’t have to pay for my own dinner that night!
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