Insist on Quality (The Financial Athlete #88)

Another day of front kicks with hands held up in a defensive posture. Back and forth across the room we front kicked bags held by others, everyone drenched in sweat.

“When are we going to learn how to defend against kicks,” I asked the instructor, panting.

To make a firm point, he replied, “When I stop seeing weak kicks, then we can proceed to learn how to defend kicks. In my class we work on quality before quantity. Whether it takes 3 weeks or 3 months or 3 years to learn how to kick with power, we will not move on to other lessons until front kicks are done correctly.

This philosophy of teaching probably wasn’t good for the business of a martial arts school. Some students grew bored with repetition and were never seen again, but those who remained could front kick with the power of someone who had practiced martial arts for years.

INSIST ON QUALITY!

Smarter for an investor to buy 4 rental houses at $200,000 each with 20% down than 8 comparable rental houses at $200,000 each with 10% down. This is not an argument against accumulating massive wealth. It is a cautionary note so that your properties will not fall like a row of dominoes because of a cash flow crunch. Engineer a foundation of a steady stream of positive cash flow with a mindset of quality before quantity.

Insist on quality for all investments. For bonds, buy no less than investment grade. For stocks, buy only those for companies with quality products, service, management, along with strong Balance Sheets, Income Statements, and Cash Flow Statements. Be aware of quality of earnings, whereby the bulk of earnings are derived from operations rather than the sale of assets or the influence of non-cash items. Compare OCF per share (operating free cash flow per share) to EPS (earnings per share). It is a red flag for a company to show negative OCF per share while showing positive EPS in the same quarterly report.

Some will criticize this approach: “You will not be adequately diversified!” To this I respond, “How does a man profit to diversify with poor assets?”

Develop quality consciousness for everything. Let all your work, from the simplest task to the most complex, be guided by quality consciousness. Do this as a consumer as well, including for food. As W. Edwards Deming taught, in the long run quality costs less.

“I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” – Bruce Lee

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