The Stock Market Cash Flow Read online

  Along the way you will also expand your financial vocabulary so that you learn to speak the language of the stock market. Don’t be afraid of the language. Embrace it. This is your money you are dealing with, so it’s critical for you to learn this language. To make it easy, I will translate and simplify new terms and concepts and give you a valuable foundation to build upon. But get used to speaking the language of money and enjoy your newfound fluency. That language will be your entry into other avenues of learning, allowing you to search out more information on your own and continue on with your financial education at your own pace.

  I also find it effective to learn by doing. Don’t just passively read this book and let the concepts wash over you. Be willing to get your hands a little dirty. I don’t mean jumping into the stock market without knowing what you’re doing. That’d be getting your hands bloody, not dirty. But be willing to try paper trading.

  We all know how foolish it sounds for a new investor to risk all their money on the very first trade. Recovering from a colossal mistake can be really hard. But little mistakes can actually be useful because you can learn a great deal from them. That’s why I recommend that beginning stock investors start with paper trading. It’s a process of practicing your trades in a real account based on actual stock market activity, but you are using paper money instead of real money.

  While paper trading, you will make mistakes. And that’s perfectly okay. There is not an investor in the world with a 100 percent success rate. Again, the idea is to learn from the mistakes to continually improve your skills, knowledge, and wisdom. Learn to manage risks, have some fun, experiment—but do it all with paper, not cash.

  One of things that gets lost in traditional schooling is the concept that making mistakes is one of the more natural ways we learn. Making mistakes should be okay, but it’s not. When I was in college, I was scared of making a mistake. If I failed a test and my grade went down to a C for the semester, I lost my scholarship, I got kicked off the basketball team, I had to leave school. The stakes were high. It didn’t matter if making those mistakes helped me learn; all that mattered were my grades.

  If you take away the penalties the school system gives us when we make mistakes, then there’s no reason for mistakes to bother us at all. Think of it like a child learning to walk. When little kids stumble and fall on their backsides they smile and stand up again for another try. It doesn’t faze them in the least. Somewhere along the way we lose that very natural willingness to keep trying. I want you to regain it. Experience is a proven way to master something new. It may not be the fanciest way to do it; it may not be pretty. But I’ve spent enough time getting up off my backside and taking huge leaps forward to know that it works.

  For more practice at real-world financial scenarios without real-world consequences, play CASHFLOW® 101 and 202, the board games Robert designed for the simulation of real investing with play money. These will help you practice your analysis and decision-making skills—and have fun while doing so.

  Don’t be a passive learner. Start being an active participant in your education now!

  Chapter One

  Become a Great Investor by Becoming a Great Student

  When you hear the words “student,” “learning,” or “school” you might think about a period in your life that had something to do with words like “classrooms” and “homework” and “lectures.” But most of us can also think of times when we had some profound discovery experience outside a traditional classroom environment. For me, there’s nothing more exciting than when some piece of knowledge clicks and I get to watch it work. Like the first time I made a layup.

  Man, I practiced and practiced my layup. I spent hours, focusing on each of the mechanics—dribbling toward the basket, aiming the ball at that sweetspot, holding the ball right for the shot, making sure I had the correct foot forward at the correct time—and when the ball finally bounced off the backboard and fell through the net? That was a great feeling. Now I don’t even have to think about it. A layup comes as naturally as running.

  Investing has been the same way—though not nearly as tough on my knees.

  If you like the feeling of excitement and possibility that comes with new discoveries, you can look forward to this journey of investment understanding. This book—and how I go about teaching—is different from those stiff Wall Street gurus or talking heads you see on TV. How so? Simple: Their run-of-the-mill advice directs you where they want you to go instead of where you want to go. I’m on your team to take you only where you want to end up. Because I’m not going to teach you where to go. I’m going to teach you how to go wherever you want.

  We Are Both Students in This Together

  I want you to know that I’m a student, like you. I’m hungry for knowledge that is useful. I love the time I spend with my mentors and teachers, and I know that there will always be more to learn. When people claim they have all the answers, I think they lose credibility from the start. Because the topic of stock market investing is so large and ever-changing, no one can know everything about it. It’s a moving target, at best.

  This book is written to help folks who are beginners or people who see themselves as students with room to grow. Chances are that you and I are on the same path. I might be further along, but we’re both in the same jungle.

  When I started learning about the stock market, I was sick of being a blind follower. I was dependent on the advice of others, and I didn’t have a way to determine if that advice was good or bad. I wanted to make some intelligent decisions and contribute to discussions with my financial advisors instead of just doing what I was told. I wanted to feel confident. You’ve probably felt the same way with your own financial responsibilities.

  We are living in a very tricky time right now. The decisions you are forced to make about your future can be scary if you don’t know enough about investing.

  This book will help you face the future with confidence. It will give you the confidence to know there are always opportunities for you to profit in any type of market: up, down, or sideways. You won’t be dependent upon others or even the direction of the market. With education comes options, and with options comes confidence.

  Globally, we are rapidly approaching some very trying times. However, I’m convinced that you can prepare and profit no matter what happens.

  Advice Is Not Education

  Wall Street experts love to tell us what they think is best for our money, but they never seem to want to teach us anything. They like the relationship uneven. The less you understand about the stock market, the more dependent on them you will feel. They want you to be at their mercy. But I see people who are starving for real knowledge.

  The so-called “experts” love to give you lots of advice and opinions. But advice is very different from education. Advice is being told what to do, whereas education is receiving real understanding—the kind of understanding that allows you to make your own decisions as to what to do. Education is transformation.

  Today, you have the chance to choose the path of education and all of its rewards.

  Transformation Is Evidence of True Education

  For me, serving as a Rich Dad Advisor is a much different experience than many people might think. Frankly, my experience has been far more about my own learning and personal development than that of being a teacher. I have the gift of spending a lot of time with Robert and Kim Kiyosaki, and the other Advisors, so my opportunity to learn is both precious and humbling.

  Robert, of course, is a very skilled teacher, yet he is also an insatiable student. His passion for education runs deep and is a fundamental part of who he is. He often reminds me of what education is and where the word comes from.

  e·duce /Id(y)oōs/

  Verb: Bring out or develop (something latent or potential).

  Notice the word potential in that definition. To reflect upon all that we can choose to become is an exercise that is both exciting and staggering. You and I have the potential
to land a 747. We can learn to play a musical instrument. We can learn to prepare a gourmet dish. We have the potential to build a house or sail a boat or speak a foreign language. The list is endless. In this light, the idea of education is elevated beyond the idea of merely transferring information from teacher to student. True education is about a transformational process that changes potential into real power.

  Education is the process of empowering us to be able to do something we could not do before. Transformation is at the heart of the Rich Dad Mission:

  To elevate the financial well being of humanity

  Context and Content

  Put simply, context is the big picture, content is the details. Information can be understood in various lights depending on the context in which it is held.

  The more you learn about investing, the more convinced you will be of the importance of context. What I mean by that is that many people want to be taught what to do before they are taught how to think. This is backward.

  Our context is often revealed by the questions we ask. The kinds of questions we Rich Dad Advisors often hear are along the lines of:

  “If you had $10,000, what would you invest in?”

  or

  “What was the most recent stock you purchased?”

  Yet almost no one ever asks these questions:

  “Andy, what are you studying right now?”

  or

  “What is the last investing class that Robert signed up for?”

  The first two questions show a context (or mindset) where the key to successful investing is nothing more than parking money in the right place. The wiser person sees investing in the context of being a student and learning and getting better at investing as a whole.

  Robert Kiyosaki is a master of teaching context. For example, the CASHFLOW Quadrant does not teach how to buy real estate or how to invest in stocks. Yet it’s a very powerful teaching tool because it helps people shift their context. It helps people examine their philosophy and how they approach earning money, whether it’s as Employees (E), Self-employed professionals (S), Business Owners (B), or Investors (I).

  Part of the power of the CASHFLOW Quadrant is that it invites each of us to examine who we are today and who we would like to become tomorrow. In many instances it suggests a profound transformation. Shifting context means improving perspective (the big picture). Studying content suggests expanding what we know (or the details) and the how-to instructions.

  Of course this book contains content, which will help you learn more about the nitty-gritty of paper assets. But every bit of instruction must be applied within the proper context.

  The Education Hierarchy ™

  It is said that beauty is in the eye of the beholder. I’d say that the same is true with value. The value of some information might be priceless to some and worthless to others. Some education is important to everyone—reading, for example. I don’t think there are many of us who can achieve success in life without knowing how to read. But the importance of most education is more subjective than we normally think. What is vital to know and what isn’t really depends on your circumstances and your goals. For example, had I actually wanted to become an exercise physiologist like my college counselor had directed, knowing the difference between a tendon and a ligament would be really a big deal. But in my current life as student of investing? Not so much.

  It bothers me that those on school boards have the power to impose their opinions on the rest of us. The school curriculum is based on what they think is valuable, and those assumptions can be inaccurate for your life’s goals. Some education really matters to the school board but doesn’t affect your financial life. Dissecting a frog comes to mind. The school board thought it was vital I learn to dissect a frog in high school. Well, I’ll tell you, I’m living proof you can live a good life without being an expert at dissecting a frog. I’ve done ok. I have a great family. I’ve made a good life. And the frogs of the world are just going to have to go on their merry way undissected.

  Now, if I were going to be a biologist, it might be a different story. It might become vital I know how to dissect a frog. But that’s because of my circumstances and my goals, not some universal dictate of a bureaucracy. If I wanted to be a biologist I would be vitally interested in frog innards. I would want to know how the insides of a frog work. It would be a driving passion. I would be burning to cut open any unsuspecting frogs I could find. I’d be reading all about frog biology, watching frogs be dissected by experienced practitioners, practicing on fake frogs—anything I could do to learn. Just as it has been for me with stocks.

  Perhaps some of the most vital education you can receive doesn’t even register on the school board radar screens, but is critical to your financial life. You might never have had a class on living a life without a job, but it may be one of your goals. You have likely never even had a class on the basics of the stock market, but the stock market is what millions of people are depending on for retirement. Evidently, these are trivial matters to the average school board. But these are subjects of vital interest to you and me.

  Is that a problem? No. You don’t need to wait for someone else to dictate what is vital to your education. Not anymore. Not when you become a serious student, because being a serious student is being an active student. Your financial success is too important to leave it to someone else and their opinion of what’s important. I stopped being passive when it comes to education a long time ago.

  I submit that becoming a successful investor begins by becoming a serious student. This is my invitation to you. It is an invitation to develop your own education hierarchy. You and I are now free from the school board’s assembly-line approach. You do not need to be force-fed from their “like it or not” menu anymore. Value is in the eye of the beholder, and you get to decide what knowledge is valuable to you!

  Once you decide what is valuable to you, all of your education opportunities can be categorized as trivial, interesting, important, or vital. Don’t waste your time on the trivial. Then be mindful of wasting too much time on that which is merely interesting. Choose to focus on the important and the vital—that’s where you can best spend your time, your effort, and your money. When you set your goals, think about what you are learning in the context of the Education Hierarchy™. When you do, you’ll find that what you study will be more meaningful, more valuable, and more fun.

  Make a list of classes you took in school and think about where these classes fit into your education hierarchy and reflect on how much or how little you use that knowledge each day. Then make a list of what you think you will need to learn to achieve the goals you have today. As you progress through this book, you might discover that mastering The 4 Pillars will be more valuable to you than anything you have ever studied before.

  Traditional schools tend to focus on what they often refer to as “general education.” The first two years of a typical college experience usually include learning a few things about a bunch of subjects instead of learning a lot about a few subjects. That’s why you’ll often see people with majors as diverse as art history and pre-med taking the same classes their freshman year. That has never made sense to me. We might end up well-rounded, but we also end up bored—and we pay for the privilege with our time and our money. And you know what? I don’t want to be well rounded. I want to be really, really, really good at building cash flow. If I need to dissect a frog, I’ll hire a biologist.

  That’s why the books in the Rich Dad Advisor series are so useful to anyone who wants to learn about investing. And with teaching tied to the four pillars, I promise not to waste your time with things that are merely interesting. Moreover, I can promise you that as an investor you will use each of these four pillars on a regular basis, and you will come to view them as vital in your investing.

  The Education Continuum ™

  The CASHFLOW Quadrant helps us figure out who we are and who we would like to become in terms of how we choose to earn money. The Education
Continuum ™ helps us to evaluate our current education level and set vital goals related to where we want to arrive educationally and the degree of our transformation. Remember that true education is transformation. It changes us.

  As you read this book, you will move along the continuum. Your context will shift as you evaluate where you are on The Education Continuum ™ and with each new topic of your financial education.

  Ignorance

  Ignorance simply means we’re not aware of something. If you’re ignorant of something, it doesn’t mean you’re stupid. I’ve observed that most of the people I teach in my workshops have a college education, and, quite frankly, most of them probably have higher IQs than I do.

  My grades in school were pretty average—and sometimes even below average. The only reason I am the one who’s often teaching others is that I have been a student of investing for a longer period of time than most people. My mentors have been students of investing longer than I have been. I was smart enough to seek out those mentors—and listen to them.

  What you lack in smarts or talent, you can make up for with passion and hard work. Effort is the great equalizer.

  Most people don’t have a clue about the stock market because it’s not a topic that is taught effectively in traditional school environments. Realize that you’re a very smart person; you just have not yet focused your full intellect on learning about investing.

  What makes paper assets somewhat dangerous is that, unlike real estate and business, almost anyone can buy stock at any time. And many people do. There is very little barrier to entry when it comes to the stock market.

  Think for a moment about your country’s retirement system. In my home country, the United States, the dominant program is a contribution retirement program called a 401(k). In this 401(k) program, workers take a portion of every paycheck and let the “experts” in the financial industry spend it on mutual funds. The majority of these workers know next to nothing about the stock market: the risks, the fees, the laws, or even the basic details of a given plan. Like a herd of sheep, they are funneled into the stock market by the Wall Street sheep herders.