Investing Capital Vs Re-Investing Profits – Is there a difference ?

This question has long plagued me. Should there be a distinction in investing capital/savings vs investing profits ? Money is money right ? Why should we then even bother answering this question ? I said this to myself and tried to convince/fool myself for a while. It didn’t work but just stayed in the “PENDING” section of my brain. I now have a few thoughts about this.

Radhakrishna Damani supposedly said “I make my money in stray dogs, and I preserve it in pedigree!”.

Financial Freedom has a huge impact on this issue. My personal opinion of Financial freedom is when you own your house, own your car, own your office(business/profession) do not have any  personal loans, and you have a source of unearned income(interest/rent/dividend/business profits etc) that is 2x of what you need on an annual basis. I’m sure Rakesh Jhunjhunwala won’t agree, but you aren’t him are you ?

By qualifying all these conditions you are sure to find yourself in the top 5-10% of the wealthiest people in India in terms of wealth.  I make this distinction between investors because this largely impacts investing style, temperament, and aggressiveness. In other words, the need and justification of risk or return per unit of risk that one is willing to take is determined by these parameters that we often ignore in the background.

I think one should not distinguish between capital and profits until one has reached his level of financial freedom. At the inception capital is scarce and these distinctions can simply confuse you. Simply following the rule of not loosing money should be good enough a motto.

However, the game changes when you do achieve Financial Freedom, and it almost changes completely. When you are at a stage when you can comfortably live your life without having to do anything, you should ask yourself whether any incremental risk that you take is worth taking. The side effect to this approach is that you can become a lazy slouch, but if that is contained, you will find yourself getting increasingly attracted towards quality. Not just in companies, but in literature, in people, in experiences and almost everything else. Funnily, the world becomes a lot more clear, because you aren’t trying to make ends meet anymore and you can step back and get a better picture of the world. You should read Quality Investing.

Always keep in mind, “risk per unit of return” and how any additional return can actually impact your life. I’ve been following this for a while now, with scepticism of my theory initially and with a lot more confidence now. Funnily, the little that i do now has made much more impact to me financially when compared to the whole lot of work that I used to for say, 10% of the profits. Your mental tuning changes, and so does your financial tuning. You find yourself saying “No” with a lot more ease and without guilt or succumbing to any pressure. On the other hand, even your “yeses” become way more confident, rare, but confident.

When you move up the financial pyramid, with a fair amount of reading, your brain too makes the move up. All the gibberish of Steve Jobs “connecting the dots” and Mungers “Multi-Disciplinary thinking” become possibilities because your brain, knows that survival can be taken for granted and in this relaxed state it explores parts of the brain that actually differentiates us from all other species.