I still wanted to learn more options winning trades to add to my arsenal. While I was at the MPH bookstore, I came across a Rich Dad Advisors book called “Stock Market Cash Flow” by Andy Tanner. I remember Robert Kiyosaki always emphasizing cash flow in any investment more than capital gains. I decided to flip through the book to find the gems. I bought the book on second browse only when I felt that I could learn and practice some of the concepts taught.
To become a great investor, we must first be a good student to learn everything about investing to become an expert. This is the first time I am being introduced to two learning measurement systems; 1) Education Continuum helps us measure how well we have learned and applied the concepts of our financial education. The levels are ignorance, awareness, competence and proficiency. 2) The Cone of Learning, developed by Edgar Dale, shows how much we learn through different methods of learning, whether active or passive learning. With these two measurement systems, we can measure how good a student we have been at investing.
Andy introduces us to the four primary classes of assets. They are business, real estate, commodities and paper assets. They offer a good comparison of different asset classes to allow each individual to assess which asset class best suits their circumstances. Since this book is about paper assets, Andy lays out more reasons why an investor should consider holding paper assets in their investment portfolio.
Next, Andy introduces his 4 Pillars of Investing. The subsequent 4 chapters dive deeper into each pillar. Personally, I find the 4 pillars very useful and guide the investor to make better decisions, whatever be the stage. There are 4 pillars:
Pillar 1 – Fundamental Analysis
Pillar 2 – Technical Analysis
Pillar 3 – Cash Flow
Pillar 4 – Risk Management
Fundamental analysis allows an investor to determine the strength and value of an entity (sovereign, corporate, individual) by understanding its financial statements. Basically, how the financial statements will look for each entity is governed by the policies in place. To change the fundamentals, policies need to change. One of the best investors of our time, Warren Buffett, is the guru on determining the fundamentals of any company. Gurus like him have a set of key fundamental ratios to rely on to determine whether a company is worth investing in. His company, Berkshire Hathaway, has implemented excellent policies that have seen his company witness huge growth and exponential growth in its company’s share prices. Andy provides similar ratios (and definitions) for investors to make stock comparisons. I find them really useful and have used them in my stock analysis.
Technical analysis helps investors determine market forces based on the supply and demand of price movements. Stock charts are used by investors to see whether there is a trend created by historical price movements. This trend or pattern that is identified by the investor will tell him the likely direction the stock will take. Andy gave a great introduction to technical analysis, explaining essential basics such as trend types, support and resistance, and some commonly used chart patterns. I’ve found that, for any investor if they get really good at it, that’s all you need.
Cash flow helps an investor to better position himself in the market. Andy uses the concept of options to illustrate this point and the opportunity to emphasize how this instrument allows the investor to profit in any market direction. Andy explains several merits of an options contract. Understanding the basics of Call/Put and combinations of both options gives an investor many ways to position himself in the market.
Risk management teaches us three ways to deal with risk, 1) Avoid risk 2) Take risk 3) Manage risk. related to risk control. An investor with more control over his investments will have less risk. The same is true when the less control an investor has over his investments, the greater the risk. Those who have no control are gamblers. It is also wise to know the maximum risk involved in any investment.
How we end up in the future all depends on what we choose today and who we surround ourselves with. How good students we are today will determine our financial future.
I thoroughly enjoyed this book as Andy is a great teacher who explains concepts in very simple language. This helps me to better understand and retain what has been taught. Hope you get a copy of his book and be enlightened.
