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The name of the game is cash flow – to be in the 10 percent who collect the cash flow from the other 90 percent.
Mutual fund companies take investors’ money and legally siphon out cash flow via hidden fees and expenses. Mutual funds are horrible investment vehicles designed for financially average people.
People who play the game of capital gains are often hoping the price of their home will go up or that the stock market will go up.
However, someone who invests for cash flow does not really care if the market or the price of a house goes up or down.
The problem with net worth is that, in markets like the one we are currently in, it is worthless.
Net worth is often measured by capital gains.
For example, if you buy a house for $1 million, technically that is part of your net worth, but if you cannot sell it for $1 million and instead have to sell it for $500,000 and your loan is for $700,000, your net worth is worthless.
Rather than use net worth, I use cash flow to measure my wealth.
The money my investments bring in every month is true wealth – not some perceived notion of value that may or may not be true.
Good cash flow strategies provide passive income that is taxed as little as possible and that you can control.
Average cash flow strategies provide passive income that is taxed at the highest income bracket and that you have little to no control over.
The following are some examples of average cash flow strategies: Savings, Stocks, Annuities
Financial planners and stockbrokers to say things like the stock market goes up 8 percent per year. They use the lure of capital gains to draw your cash flow into their pockets.
Real estate agents use a similar sales pitch. They often say, “You’d better buy now before prices go up.”
The idea of buying before prices go up is buying on the expectation of capital gains. Again the salesperson uses the lure of capital gains to get your cash flow. That’s the game. The moment you sign that mortgage, cash flows from you to them.
I am not against the concept of mutual funds. I am, however, against the high fees and hidden expenses of mutual funds that rob investors of their money. On top of that, there are thousands of mutual funds, but less than 30 percent of them actually beat the S&P 500. In other words, all you have to do is invest in an S&P Index Fund and you will beat over 70 percent of all mutual fund managers – all with less money and higher returns.
Rather than use the words long term, a sophisticated investor would use the words exit strategy.
A smart investor knows it’s not about how long you hold on to an investment. It’s about how you plan to increase your wealth with that investment over a stated period of time.
Warren Buffett: “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.”
There are four basic investment categories. They are:
1. Businesses: The rich often own many businesses providing passive income, while an average person may have many jobs providing earned income.
2. Income-producing investment real estate: These are properties that provide passive income every month in the form of rent. Your home or your vacation home doesn’t count, even if your financial planner tells you they’re assets.
3. Paper assets – stocks, bonds, savings, annuities, insurance, and mutual funds: Most average investors have paper assets because they are easy to buy, require little management, and are liquid – meaning they are easy to get out of.
4. Commodities – gold, silver, oil, platinum, etc.: Most average investors do not know how or where to buy commodities. In many cases, they don’t even know how or where to buy physical gold or silver.
A sophisticated investor invests in all four categories. That is true diversification.
Dr. Fuller said, “Words are the most powerful tools invented by humans.”
By making the simple complex, the financial world sounds intelligent and makes you feel stupid when it comes to money. When you feel stupid, it is easier to take your money.
A broad definition of a derivative is a substance that can be made from another substance. For example, orange juice is a derivative of an orange.
One definition of a financial derivative is having a value from an underlying variable asset. By way of example, a share of common stock is a derivative of an existing company, such as Apple Computers. Simply said, when you buy a share of Apple, you are buying a derivative of Apple, the company. And when you buy a share of a mutual fund, you are buying a derivative of that fund, which is a derivative of stocks – a derivative of a derivative.
Derivatives are also tools for mass financial creation.
Prior to 1971, the dollar was a derivative of gold.
After 1971, the dollar became a derivative of debt, an IOU known as U.S. bonds and T-bills, backed by the promise of the U.S. taxpayer to pay the bills.
Print Your Own Money:
Creating a derivative is as easy as squeezing juice from an orange.
By simplifying and understanding the definition of a financial derivative, you can easily tap into the power of that word.
We can all create simple derivatives.
We can all create money out of thin air – derivatives of our thoughts.
We all have the power to print our own money if we train our minds to think in terms of derivatives.
In other words, money can be a derivative of financial knowledge.
I do not save money is because I am a borrower, not a saver.
I love debt – as long as someone else will pay for that debt.
I do what the banks do.
For example, I borrow $1 million at 10 percent and buy an apartment complex.
I get my tenants to pay me at least 20 percent for the $1 million I borrowed at 10 percent interest.
I sell the license to print this book to over fifty publishers throughout the world.
The publishers then take the license they bought from me, and they print books, another derivative, and ship them to bookstores in their country.
Once a quarter, I receive royalty payments from these fifty publishers.
The royalty payments are derivatives of the books, the books are derivatives of the license, the license is a derivative of this book, and this book is a derivative of me.
You need to know and use such words as derivative, cash flow, cap rate, and mitigate.
Rich dad’s advice was never to think, look, or act like a poor person. He constantly reminded me that “the world treats you as you treat yourself.”
If I don’t have money for something I want, I use my head to figure out how to get it. I do not let the amount of money in my bank account dictate the boundaries of my life.
One advisor I follow religiously is Richard Russell, an expert on the stock market.
I consider the stock market to be a Ponzi scheme. If no new money comes in, the market crashes. The same is true with real estate or the bond markets.
One big reason why so many people struggle financially is because they have little to sell, don’t know how to sell, or both. So if you are struggling financially, find something to sell, learn to sell better, or both.
Building a business and taking it public, which means selling shares on a stock exchange, is the ultimate goal of an entrepreneur.
Why we’re in this financial crisis: China is selling and the United States is buying.
School trained us to take tests alone. If I were to collaborate or ask for help from my classmates on a test, that was called cheating. I believe that this line of thinking causes millions of people to operate as islands, afraid of cooperating with others because they are trained that cooperation is somehow akin to cheating.
Because the United States is printing money, all other countries will probably have to print money. If other countries do not print, then their countries’ currency will become too strong against the dollar and exports to the United States will slow down, causing a slowdown in the exporting country’s economy. This probably means inflation in every country that trades with the United States.
As I write this in June 2009, I believe we are merely in the eye of the storm, and the worst is yet to come.
Back in August 2007, it took just a $20 billion a month mortgage reset to blow down the financial straw houses of Lehman Brothers and Bear Stearns. The economy of Iceland collapsed with the first huff from the big bad wolf. Bank of America, Royal Bank of Scotland, and AIG, financial houses of sticks, are weak and wobbly today. California, the eighth largest economy in the world, is on the brink of a financial meltdown, as is the Japanese economy.
My question is: What will a nearly $40 billion a month mortgage reset from October to November 2011 bring?
The way you print your own money is by achieving an infinite return on your money. The definition I use for an infinite return is “money for nothing.”
I print my own money when I get back all the money I used to acquire an asset, still own the asset, and enjoy the benefits of the cash flow from the asset.
The key to the success of the Rich Dad Company is that the business designs and creates assets rather than products. For example, we will not produce this book. Rather, we will create a derivative of the book, a literary license, and sell the rights to the license to publishers for different languages. We also sell licenses for the rights to produce our games, brand trademarks, and franchise rights.
There are many ways you can print your own money with paper assets such as stocks. One way is to use option strategies.
For example, let’s say I buy a thousand shares of a stock for $2 a share.
I then go to the options market and sell an option to buy my thousand shares for a $1 premium per share ($1,000) for thirty days.
If the stock hits $3 per share or higher, the person who purchased the option can buy the stock at $3.
If the stock does not hit $3 in thirty days, I keep his option money of $1,000.
Again, notice that I buy for the long term and sell time by the month.
In this overly simplified example, selling a thirty-day option puts $1,000 immediately in my pocket.
If I sell another thirty-day option with the same stock on the same terms and the stock does not go above $3, I make another $1,000 off my original $2,000 investment while still owning my stock.
I will have made 100 percent of my initial $2,000 back, and have printed my own money via my financial knowledge.
To me, this makes more sense than leaving your money in mutual funds for the long term and having your money stolen legally by short-term stock and option traders.
I would rather hold gold and silver than cash. Since I am able to print my own money, I do not need to worry about saving money for a rainy day. With governments printing so much money, I feel safer saving gold and silver.
People who invest for capital gains are gambling. As Warren Buffett has said, “The dumbest reason in the world to buy a stock is because it is going up.” Investing for capital gains is also why most investors get depressed when the stock market drops or their home declines in value. Investing for capital gains is much like gambling because the investor has very little control over the ups and downs of a market. A person with a financial education invests for both cash flow and capital gains.
If your money is just parked waiting for appreciation or an increase in the share price, your currency is not productive and not working for you.
Investing for cash flow takes most of the risk out of investing. It’s hard to feel like a loser as long as cash is flowing into your pockets – even if your asset price has depreciated. On the other hand, if your asset appreciates, it’s an added bonus since you are already collecting cash flow.
A technical investor looks for historical patterns in markets based on cash flow and makes investments based on past patterns and future predictions of market behavior.
A financially educated investor also wants to know where cash is flowing from and which market it is flowing into.
For example, when the stock market was crashing and people were afraid, a lot of money was flowing into the gold market.
A technical investor may have been able to predict that gold was going to rise and that the stock market was going to fall based on technical indicators and would then have moved his money to gold before everyone else.
One reason why financially educated people want to keep their money moving is because if they park their money in one asset class, as many amateur investors do, they may lose their money when cash flows out of that asset class.
The product is the smallest or least important part of the B-I Triangle. The reason so many people fail when starting a business is because they focus on the product, not the entire B-I Triangle. The same is true in real estate. Many investors look only at the property rather than the entire B-I Triangle.
Quickly analyze most investments by simply asking myself:
Who are the partners, and do I want to be a partner with them?
What is the financing structure and is it favorable?
How competent is the management?
If those questions are satisfied, I may look further into the investment.
Advantages: A business is one of the most powerful assets to own because you can benefit from tax advantages, leverage people to increase your cash flow, and have control of your operations. The richest people in the world build businesses. Examples are Steve Jobs, founder of Apple; Thomas Edison, founder of General Electric; and Sergey Brin, founder of Google.
Disadvantages: Businesses are “people intense.” By that I mean that you have to manage employees, clients, and customers. People skills and leadership skills, as well as talented people who can work as a team, are essential for a business to be a success. In my opinion, of all four asset classes, a business takes the most financial intelligence and experience to be successful.
Advantages: Real estate can have high returns due to using a bank’s money for leverage via financing and other people’s money (OPM) via investors, capitalizing from tax advantages like depreciation, and collecting steady cash flow if the asset is managed well.
Disadvantages: Real estate is a management-intensive asset, is illiquid, and if mismanaged can cost you a lot of money. After a business, real estate requires the second highest level of financial intelligence.
COMMODITIES: GOLD, SILVER, OIL, ETC.
Advantages: Commodities are a good hedge or protection against inflation – which is important when governments are printing a lot of money, as they are today. The reason they buffer against inflation is because they are tangible assets that are purchased with currency. So when the currency supply increases there are more dollars chasing the same amount of goods. This causes the price of the commodities to rise, or inflate. Good examples of this are oil, gold, and silver, all of which are worth much more than they were a few years ago thanks to the Fed’s printing presses.
Disadvantages: Because commodities are physical assets, you have to make sure they are stored properly.
Once you decide which asset class is best for you, and which asset class you are most interested in, then I suggest studying that asset class and investing your time before investing your money. The reason I say this is because it is not the asset itself that makes you rich. You can lose money in any of the asset classes. Rather, it is your knowledge of each asset class that makes you rich.
The problem with a diversified portfolio of mutual funds is that you are not really diversified, since all mutual funds are in the stock market – paper assets. True diversification includes investing in all four asset classes, not just different types of one asset class. My asset column contains all four assets: businesses, real estate, paper assets, and commodities.
It is important to focus. Choose the asset class you want to be good in and follow one course until you are successful. For example, if you are interested in real estate, study, practice, start small, and focus until you have cash flowing into your bank account consistently. Once you are certain you can produce cash flow in your small deals then cautiously go after bigger deals, staying focused on making sure the investment cash flows.
I sell Rich Dad Franchises to people who want to own their own businesses. A Rich Dad Franchise costs a person approximately $35,000, and in about two years, if they follow our business training programs, they have the potential to earn $100,000 to $200,000 a year.
Professional investors invest with insurance. Most of us would not drive a car or own a home without insurance. Yet most people invest without insurance. That is very risky. For example, when I invest in the stock market, I can buy insurance, such as a put option. Let’s say I purchase a stock for $10. I can also buy a put option for $1 to pay me $9 if the stock price falls. If the stock drops to $5, the put option acts as insurance and pays me $9 for a stock worth $5.
For my real estate investments, I have insurance against losses to fire, floods, and other natural disasters. Another bonus of owning real estate is that the rent my tenants pay me covers the cost of the insurance. If my property burns down, I do not lose money, because I have insurance to cover my losses.
Good debt is tax-free money. Since it is borrowed money, you don’t pay taxes for it or to use it. For example, if I put $20,000 as a down payment on a rental property and borrow $80,000, in most cases the $20,000 is my money after taxes and $80,000 is tax-free money. The key to using debt is to know how to borrow wisely and how to pay the money back. Knowing how to borrow money wisely, and getting someone else, such as your tenants or your business, to pay the money back is your credit-ability, or credibility. The higher your credibility, the more debt you can use to become rich – tax-free.
We buy (real estate) in areas where there are jobs. The real value of real estate is related to jobs. We own apartment houses in Texas and Oklahoma, where there are jobs in the oil industry. We do not own anything in Detroit, where jobs are leaving and real estate values are dropping.
We own property where there are natural or government constraints. For example, we own apartments where there is a no-growth boundary around the city. In other words, the city cannot spread out any farther, which makes properties more valuable because it limits supply. We also own properties that are bordered by a river, a constraint of nature, prohibiting further growth.
When I have excess amounts of cash flow, rather than hold the excess cash in a savings account, I choose to hold it in gold and silver.
Shout out to sivers.org for doing this written summary
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