THE 4 PILLARS OF INVESTING Cash Flow: Module 3

THE 4 PILLARS OF INVESTING

Cash Flow: Module 3

TRANSCRIPTION

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The 4 Pillars of Investing

A transcription of

CASH FLOW

MODULE 1 2 3 4 5

In fact, brokers--what's interesting, I was teaching in California actually and I was teaching a live class and a lot of brokers come all the time. That broker came up to me and said and he said, "Andy, the though thing is I can't really make a lot of recommendations to people because they're not educated. I mean, do I want the liability of...?" And he's so right. Do I want someone who's close to retirement come in and want the trade options and stuff? Not if they're not educated. It's a tough deal.

What happens so often, and I think a lot of brokers would freely admit to this, is we get what's called broiler-plate investing. We go and we say, "Okay. Here's my age, here's my income, here's my transfer risk, yadi ya ya" Then, they give us a broiler-plate and just say, "Okay. Here's you're investments, here's your flight. Good luck."

What happens is you get to a crossroads which many millions of people that are at it right now where you have a crossroads, where you got a choice between A and B and here's your choice: A. is you could tell your goals to fit in strategy that you're in now which usually means you sit down with them and you say, "Okay. Well, we're going to have to work a little longer while you're in the office. We're going to live cheaper and save more money and we're going to live less as an inheritance to our children.

So what they do is they take the big goals and the fun goals, and a country club, and the world traveling, the beach house, and all the stuff that you and I would really like to dare dream about and they just take it away and they say, "Look, she's not realistic. All these mutual funds are the only likely to perform as well and they might not even perform. They might wind up down like this." It's rough because they could tell strategy. Okay. Choice B is education. You're saying, "No. I want to have this life I dreamed of. I only live one time, and I don't even have opportunity two, or three, or four lives then unless you come back as an ant or something and then you might get stepped on.

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So, as a human being, you get one shot at this thing. We want to learn strategies maybe fit our goals. Well, the problem with that is if we want goals or strategies that provide us more income faster, we will be usually using some type of leverage and that means more risk management. That means more active involvement. I, for one, like Choice B simply because I don't want to let go of that stuff. I like the idea of having a cool lifestyle. I like the life I have right now and I don't want to give it up. I have to learn and improve on it.

So, working on and you're living cheaper, you're living less to the family is not an option that I like. I'd rather say, "Okay. If I need to be more aggressive--and we're going to talk about leverage now, okay? But a lot of people are running out of time, getting close to being empty and they'd got to choose which road they want, and I like the road of education. It's just my personal preference and I think you're probably the same.

So let's say I want to go to Hawaii and that's my goal. How will I get there? Well, here's the thing, you got to choose a vehicle. In going back to this, if you ride a bicycle, then you've got to live with what a bicycle can give you or you got an upgrade to a better vehicle. Choice A; Well, looking at this bicycle we've got set up in the riding, this is the radius of which you can travel. "Okay. Well, I wanted spatial." That's more risk. Spatial is more complex than bikes, right?

So that's kind of the analogy I want to make here with as you choose your cash flow, and that's our topic is cash flow, see, you also need to choose not just buying and selling; you need to choose what type of leverage you want or don't want and what type of vehicle you get. So, if you choose B saying, "Okay. I need a car or a truck or a plane to get me here," that's the big deal. So it's a really great analogy.

Let's say want to walk to Hawaii. Well, are you going over here and you're going to walk to the water's edge maybe in San Diego? That's a nice place to take off. Maybe you swim out of the bay in San Francisco.

Now, you're going to have to swim a long way and walk a long way, but probably not the best way to get there, right? Certainly, not a lot of people get here walking. You just can't walk very far, okay? We ride a bicycle. Now you can bike across the country. It takes a while, but Lance Armstrong from Austin right here could do it, but he'd have to pick up a lot of speed by the time he hit the water. If you hit that beach, you better be moving if you want to go to Hawaii. Not the best vehicle.

There's probably less people killed here than maybe in a car. Even then, you're going to give lot of speed. In fact, you know what, the best vehicle I think on the board is the plane, but it's the most complex vehicle of all of these, right? This guy flying this thing, it looks like he's having a good

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time and he's making it look easy. But you know what, he's been trained. For him, a pilot, it is easy for a pilot. It's just not easy to fly a plane for you and I. We have to go to flight school and which brings us to risk.

It's a very important part of your cash flows strategy because whatever cash flow strategy you choose, you're going to have to learn what the risk is and how to deal with that risk. Now, it's interesting because most people, I bet you're more likely to get hit by a car, fall off your bike, or die at a car wreck down here. I bet per travel, this is probably the safest. I don't know but I know it's safe for the car travel, but is probably the safest.

I understand a couple of questions we need to ask you. First, what vehicle do you want to use? What cash flow vehicle do you want to use? You got your--look, you got your fundamentals. We call that fundamentals and FA, Fundamental Analysis. Then, you got your technicals, right? You get technical analysis and that is where you're at, okay?

Now, how do you get a harvest? What vehicle you want to fly on this when the harvest did? You want to go on this when the harvest did. That's why we're talking about it. One of things I don't like about market is they tend to do this. Let's draw this graph here. What they'll do is they'll pitch this and say, "Okay. Here's your risk. Okay? R-I-S-K." Here's risk. Then, they'll say, "Here's reward down here, so we'll abbreviate. So we have to live painfully through my inability that we will painfully take that on. So, here's our reward.

What they're saying is is that it looks maybe to be something like this that the more reward you're seeking, the more risk you have to take. That's generally because they're just looking in a vehicle, but that doesn't answer the second question which is, who's driving? If you take the average person and you put them in this plane, they're going to crash. In fact, when you look at the guy who's got the most leverage, he's also got the most education.

Now they say planes are safe than the cars. I don't believe that. This thing's a million pounds 747. It's one million pounds. It's flying at 40,000 feet in the air. It's going 600, 500 miles an hour. There's a lot of bad things that can happen to something that weighs a million pounds 40,000 feet in the air. The atmosphere is different. It's like the Iron Man. You have to solve the arising problem. All this type of stuff goes on. So, this thing blows entirely and rolled to a stop.

So I think on of the things that people do is they make a mistake here. They say, "Well, I don't want to do anything aggressive. I don't want anything that can really get me where I want to go fast just because I've heard that it's aggressive." Remember that on this risk reward thing, I've heard that if I want a lot of reward, I have to take a lot of risk.

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I don't want to do that. So I'll take less reward and I'll be in the vehicle that has less risk. Well, that's fine, but you've go to ask who's driving this car? In my opinion, is a BMW a safe car? That's on who's driving. Put a drank teenager behind the wheel. So my Robert Mcken (ph) and I, we talked about this a lot. We think people are more risky than vehicles.

I'd rather be in this plane with someone who really knows what he is doing than in this car with someone who doesn't know what he's doing. So, I think points were all taken. It's who's driving. When you have someone that goes through the education continuum and who has awareness, confidence becomes proficient, I think that reduces risk.

The greatest thing you could do to reduce your risk, I think, is get educated. I really believe that's true. So, let's look at the continuum here and do some math. It's very, very easy. Here's how we calculate the rate-of-return we want.

Now, why am I talking about this? Well, let's go back here. If we want to do this, we're playing a little catch up here. This is all about rate-of-return. What percent are you getting? Maybe over here, you're getting two percent. It looks like that's what's going to be likely or maybe five percent. Well, five percent, that's what you will get. That's what will happen. So maybe over here you go for higher percent, so this is what you'll get. So it's all about your rate-of-return.

If that's true, we need to know how to calculate this rate of return. "Oh, there is a method the way he's doing here. I see." So here is our formula for rate-of-return. It's actually very easy to do. They call this arithmetic return. Another way you might have seen this written is Vfinal, the final value of the investment, minus the initial value of your investment, divided by the initial which is essentially the same thing that we have right here.

So, very simple. Very simple. You could do this if you'd like. So here I have my final investment. Maybe I bought a stock at hundred and I sell the stock here at 110. So I take 110 minus 100, it would be what? I think that would be 10, right? I divide it by 100 and that gives me 0.1 or 10 percent. Very simple.

Well, there's a couple of different ways you can increase your rate-of-return. Number one is, you could find something that grows bigger, okay? A big gain. In other words, the stock goes from 100 to 200. And guess what? That doesn't happen much. You'll be sadly disappointed if you try to double your money every time. It just doesn't happen.

So the first way is to find huge gains and you're getting small cap hoping they go big and get huge gains, okay? There's another way you can go about it, though. Another way you could go on about

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