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Book Review of Stock Market Cash Flow
I still wanted to know more winning trades with options to add to my arsenal. While I was at the MPH bookstore, I saw a Rich Dad Advisors book called “Stock Market Cash Flow” by Andy Tanner. I remembered that Robert Kiyosaki always emphasized cash flow in any investment over capital gains. I decided to flip through the book to find the gems. I only bought the book on my second browse after realizing that I could learn and practice some of the concepts taught.
To be a great investor, we must first be a great student to learn everything there is to know about investing so that we can become an expert. This is the first time I am familiar with two learning measurement systems; 1) The educational continuum helps us measure how well we have learned and applied the concepts of our financial education. The levels are ignorance, awareness, competence and expertise. 2) The Learning Cone, developed by Edgar Dale, shows how much we retain through different ways of learning, be it active or passive learning. With these two measurement systems, we can measure how good a student we were at investing.
Andy introduces us to four basic asset classes. These are companies, real estate, goods and paper assets. He provided a good comparison of the different asset classes so that each individual could assess which asset class is best suited to their circumstances. Since this book is about paper assets, Andy listed several reasons why an investor should consider paper assets in their investment portfolio.
Then Andy presents his 4 pillars of investing. The next 4 chapters delve into each pillar. Personally, I find the 4 pillars very useful and guide an investor, no matter what level they are at, to make better decisions. The 4 pillars are:
· Pillar 1 – fundamental analysis
· 2nd pillar – technical analysis
· Pillar 3 – cash flow
· Pillar 4 – Risk management
Fundamental analysis allows an investor to determine the strength and value of an entity (government, corporate, individual) by understanding its financial statements. Basically, what the financial statements will look like for an individual organization is governed by the policies applied. Policies must change to change the foundations. One of the best investors of our time, Warren Buffet, is a guru in determining the foundation of any business. Gurus like him have a set of important fundamental ratios they can rely on to determine if a company is worth investing in. His company, Berkshire Hathaway, implemented great policies that saw his company grow tremendously and his company’s stock prices increase exponentially. Andy provided investors with similar ratios (and definitions) to compare stocks. I find them very useful and have used them in my stock analysis.
Technical analysis helps investors determine market strength based on supply and demand price movements. A stock chart is used by investors to determine if there is a trend created by past price movements. This trend or pattern identified by the investor will tell him the likely movement of the stock. Andy gave a pretty good introduction to technical analysis, explaining the essential basics such as trend types, support and resistance, and some commonly used chart patterns. I have found that this is all any investor needs to survive if they really master them.
Cash flow helps the investor to position himself better in the market. Andy uses the concept of options to illustrate this point and highlights the opportunity of how this instrument allows the investor to profit in any market direction. Andy explains the many features of an option contract. Understanding the basics of Call/Put and the combination of the two options allows the investor to have many ways to position themselves in the market.
Risk management teaches us three ways to deal with risk: 1) risk avoidance 2) risk taking 3) risk management. Risk is related to control. An investor with more control over his investment will have less risk. Equally, if an investor has less control over his investment, he will have more risk. Those without control are gamblers. It is also wise to know the maximum risk involved in an investment.
How we end up in the future depends on the decisions we make today and who we surround ourselves with. How good a student we are today will determine our financial future.
I really enjoyed this book as Andy is a great teacher who explains the concepts in very simple language. This allows me to better understand and remember what I have learned. I hope you get a copy of his book and are enlightened.
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