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Book Review of Stock Market Cash Flow
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 over capital gains. I decided to flip through the book to find the gems. I bought the book on the second browse after I found that I could learn and practice some of the concepts taught.
To be a great investor, you must first be a great student to learn everything there is to know about investing to become an expert. This is my first introduction to two learning measurement systems; 1) Academic continuity helps us measure how well we have learned and applied our financial education concepts. The levels are ignorance, awareness, competence and proficiency. 2) The Cone of Learning, developed by Edgar Dale, shows how much we retain in different ways of learning, be it active or passive learning. Through these two measurement systems, we can measure how well we are investing in students.
Andy introduces us to the four primary classes of assets. They are business, real estate, commodities and paper assets. They provide a good comparison of different asset classes to allow each individual to assess which asset class is best suited to their circumstances. Since this book is about paper assets, Andy gives more reasons why an investor should consider holding paper assets in their investment portfolio.
Next, Andy introduces his 4 pillars of investing. The next 4 chapters dive deeper into each pillar. Personally, I find the 4 pillars very helpful and guide an investor to make better decisions no matter what level he/she is at. There are 4 pillars:
· Column 1 – Fundamental analysis
· Column 2 – Technical Analysis
· Column 3 – Cash Flow
· Pillar 4 – Risk Management
Fundamental analysis allows an investor to understand the financial statements of an entity (sovereign, corporate, individual) to determine its strength and value. Basically, what the financial statement will look like for each entity is controlled by the applied policies. Changing the fundamentals requires changing policies. One of the best investors of our time, Warren Buffett, is a master at determining the fundamentals of any company. Gurus like him have a set of critical fundamental ratios to rely on to determine whether a company is worth investing in. His company Berkshire Hathaway has implemented excellent strategies that have led to huge and exponential growth in his company’s share prices. Andy provides similar ratios (and definitions) for investors to compare stocks. I find them really useful and use them in my stock analysis.
Technical analysis helps investors determine market strength based on demand and supply of price movements. Stock charts are used by investors to see if there is a trend created by historical price movements. This trend or pattern identified by the investor will tell him the likely movement of the stock. Andy provides a great introduction to technical analysis, explaining essential basics such as trend types, support and resistance, and some commonly used chart patterns. I find that any investor must acquire this if they are to become truly proficient.
Cash flow helps an investor position himself well in the market. Andy uses the concept of options to illustrate this point and emphasizes how this tool allows the investor to profit in any market direction. Andy explains several properties of option contracts. Understanding the basics of call/put and the combination of both options provides an investor with many ways to position themselves in the market.
Risk management teaches us three ways to deal with risk, 1) avoid risk 2) take risk 3) manage risk. Relates to risk control. An investor with more control over an investment will take less risk. The same is true when an investor has less control 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 the investment.
How we end up in the future all depends on the choices we make today and who we surround ourselves with. How good a student we are today will determine our financial future.
I loved this book as Andy is a great teacher who explains the concepts in very simple language. This allows me to better understand and retain what is taught. Hope you get a copy of his book and be enlightened.
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