I spoke to an old friend yesterday. She was telling me about her property investments... 

"I never planned to become a landlord," she says. "It just sort of worked out like that. At first I'd live in it. Then I'd get bored and decide I wanted something bigger. But instead of selling the old place, I figured property prices were rising, and I was making plenty of money, so what the hell... I'd rent it. Next thing you know, I own two flats in central London and a loft in Manhattan."

The problem was, she overpaid for the properties and borrowed too much money. Her rents never covered her mortgage payments. And now that her properties have fallen in price, her loans are more than the properties are worth. I expect she'll have to file for bankruptcy. 

Another friend owns property in Detroit. He buys apartment buildings. Prices are so low in Detroit, they can't fall any farther. My friend will never be "upside down." And Detroit has one of the strongest rental markets in America because no one wants the responsibility of property ownership. My friend has no trouble maintaining 95% occupancy. These apartment buildings gush so much cash, his income is double his mortgage payments... and he makes about 20% a year in bottom-line profit.

Compounding is the only mathematically certain way of building a fortune from your investments. To follow a compounding strategy, all you need is patience and a safe investment that generates cash. By plowing the cash back into your initial investment, your money multiplies like bacteria. (I explained more about how a compounding works in this essay.)

If you're serious about building a fortune, you should never make an investment that doesn't generate a positive cash flow. Otherwise you can't compound.

My London friend did not invest for cash flow. She hoped capital appreciation would protect her. But when you use this strategy, you're usually playing the "greater fool" game... You're hoping another sucker will come along and buy your foolish investments at an even greater price. 

My Detroit friend is receiving cash flow. Even if his property fell in price – which it wouldn't – he wouldn't care. He's compounding the income, putting his cash in other cash-producing investments. I guarantee you, in 20 years, he'll be a very rich man.

It all boils down to five words: Make sure you get paid. 

Never let anyone use your money for free. In the stock market, this means earning a dividend, an interest rate, or an earnings yield. If a stock doesn't pay you a regular fee for investing your cash in it, you're making the mistake of my London friend. This is especially true in the current environment, where cash is precious.

Tom Take ExxonMobil, which I recently recommended to readers of my 12% Letter... ExxonMobil is the world's largest company and probably the world's safest. It generates an 11% free cash flow yield and pays a 2% dividend yield. 

We enhanced this dividend by selling call options against our position. My readers are now making 18% a year from their position in one of the world's greatest blue chips. We'll hold this position for 10 years. Every $1,000 my readers invest will turn into $5,000...

Good investing,

Tom