The Sex and Cash Theory

About six months ago, a cafe re-opened within a few kilometres of where I’m writing this post.

And even though this area needed another coffee machine like you and I need a kick in the shins, this one was an absolute sitter. The footpath leading up to its front door was layered with gold.

In fact, if the only thing the new owners did was make a nice coffee to grab on the way to work plus some fresh, yummy sandwiches for lunch, their cash register would have been jam packed with notes from day one and most of their headaches reduced to a dull pain.

Instead, they went upmarket and did the funky thing. They decked the place out like Buckingham Palace with some expensive looking furniture and then introduced an exquisite new menu few people were interested in.

And if that wasn’t enough to make the punters baulk, the coffee certainly did. They employed a kid to look after the coffee machine but unfortunately the poor bloke barely knew the difference between Fanta and a flat white and within two weeks their reputation was in tatters. Irreparable. Gone.

Sadly, the punters had been waiting weeks for the doors to re-open hoping to get something simple, tasty and affordable.

But the owners went after the champagne and caviar and ignored their basic bread and butter.

Many investors do the same thing.

The Sex and Cash Theory
The only reason the new owners didn’t knock it out of the park is because they didn’t understand the Sex and Cash Theory [1].

Cash businesses are usually low risk and boring but they pay the bills (coffee). Sexy businesses can make good money when you get it right and the market has a calling for it (funky furniture and exquisite menus), however they’re also higher risk as well.

Another example might be an author. Sexy might be the book he’s writing but his day job is the cash.

Real estate is another example. Sexy is the sales, cash is the property management.

Sex and Cash Investments
Sex and Cash investments are the difference between the Income Effect and the Wealth Effect, or certainty and uncertainty.

The Wealth Effect feeds your ego, while the Income Effect feeds your belly.

It goes like this…

The Wealth Effect (sexy) relies on capital gain to create wealth. I.e. buy low, sell high. The wealth effect makes us feel good when markets go up and our assets appreciate in value but leaves us gripped with fear when the markets go down.

The wealth effect is what Sydney property owners are experiencing at the moment.

However, the problem with buying sexy assets is you have to buy the right asset at the right time in the right market and then sell it at the right time to extract maximum value.

Trying to get all of that right is very stressful because you’re constantly exposed to the vagaries of the market which means you don’t have any control over the final outcome. In turn it creates a lot of uncertainty, especially when planning for retirement. There’s too much champagne and caviar in it.

The Income Effect (cash) on the other hand refers to the income derived from assets. Most of all, it doesn’t rely on the markets going up to create wealth. In fact, it works even better when the markets go down.

The income effect creates wealth by ‘reinvesting’ the income from the existing assets to buy more assets, which in turn generates more income to buy more assets and the cycle continues so that eventually the income effect creates a compound effect.

It also produces superior results to the wealth effect because it can be measured and managed. You can’t do that with the wealth effect.

The biggest advantage of the income effect is the certainty it provides, especially in retirement. The income effect is much more consistent and reliable because it is not reliant on markets going up.

The income effect is your bread and butter.

Ironically, if you’re invested in quality assets to create the income effect, they will eventually appreciate in capital value anyway, thereby creating the wealth effect. The challenge when that happens is the wealth effect becomes a distraction because it starts feeding your ego (like your house) and investors run the risk of ignoring what’s most important, income and certainty.

Milk and Muscle
Sex and Cash lies at the heart of Suncow’s ‘Milk and Muscle Theory’. The only difference is milk and muscle is sex and cash in action. It shows clients how to create the sort of income they need to retire on. Not surprisingly, our clients love it because of the certainty it creates. It’s predictable and measurable.

Sexy is only skin deep and can be fleeting. Cash on the other hand is real heart and soul stuff. It’s sex appeals runs deep and eventually can’t be ignored any longer.

It has a lot more spunk factor too. Serious spunk factor.

Have a great weekend!

Adam

Footnote: The Sex and Cash Theory is a term I borrowed from one of my favorite bloggers, Hugh MacLeod, of Gaping Void.

Back paddock – Seems like the recipe for Pistachio Fudge in last week’s Moowsletter – A Blokes Guide to Valentines Day, was a bit of a hit. Glad you liked it.

I’ve got another little surprise lined up for Easter as well. It’s just as easy to make and is ultra-yummy, but only if you like chocolate!