The Introduction to “Cash Flow Your Way to Wealth”


I’m excited to say that my second book, Cash Flow Your Way to Wealth, is fully written and going through the first edit.  It should be coming out in a couple of months.  To give you a taste for what this book will be about, I’ve provided the introduction below.

Introduction

Most people have the opportunity to become wealthy within their lifetimes, just using the income they have from their jobs. The reason that few do is because of the way they handle their money once they earn it, also known as how they setup their cash flow. Their whole lives they setup and maintain the cash flow of a middle class person, or even the cash flow of a poor person. People who will become rich and stay that way have setup the cash flow of a rich person. Even if you were to take all of the wealth accumulated by the wealthy people away, they would be wealthy again in a few years because of the way they have configured their cash flow. Likewise, if you gave the poor or the middle class people a bunch of money, in a few years they would be back where they were again because of the way they setup their cash flow. Knowing how to setup the cash flow of a rich person is the key to becoming wealthy, regardless of your income level.

The term “cash flow” is often used to describe the amount of money passing through your fingers each month, and many people say that the reason they cannot improve their financial place in life is because their cash flow is too small. But your cash flow is also how money flows into, through, and out of your life. This is the definition we’ll use in this book. Everyone has some sort of cash flow, regardless of their income. Even if you don’t deliberately configure and control your cash flow using a cash flow plan, you still have one.

Most people have a cash flow that is exactly balanced – every dollar that comes in goes out. In fact, many people don’t even see their money at all since their checks are direct deposited and their bills are paid automatically. They just know that their lights don’t typically get shut off, so things must be working. The issue with this sort of cash flow, however, is that it is extremely fragile. Any disruption in your income stream will result in the light bills not being paid and your lights being shut off.

The purpose of this book is to help the reader develop a different sort of cash flow. One that causes wealth to be built over time. Very quickly (in less than a year) an individual with this sort of cash flow will be protected from minor disturbances such as a missed paycheck or an unexpected expense like a car repair. Within a few years the same individual will be protected from major disturbances like a job loss with a couple of months spent finding another one. After a couple of decades, financial independence can be built – that magical state where one no longer depends on a job to pay for basic bills and put food on the table. In other words, financial security.

To understand the different kinds of cash flow, picture a large canyon. A water source flows into this canyon from one end. For some people it is a small creek. For others it is a moderate stream. For others it is a raging river.

Many people would see the raging river and think that the individual who owned that canyon would never run out of water. Truth be told, most people we think of as rich do not necessary have a rich-person cash flow, but instead are individuals with a raging water income. These are people who are NBA stars with multi-milllion dollar deals, rock stars, brain surgeons, and Wall Street financiers. They probably drive Lamborghinis and Ferraris, live in huge homes with maybe a servant or two, and are always going on lavish vacations and out to the finest restaurants.

Those in the middle class would have a moderate stream income. Many of them would drive late model cars, but be limited to SUVs and maybe a lessor luxury-brand like a Lexus. They would stilll eat out a lot but usually at the moderately priced chains with perhaps a spurge on a nicer restaurant once in a while. They would have nice homes with large yards and granite counter-tops, but nothing like the mansions owned by the raging water set. While they would not have as much water flowing through their canyons, you would still not expect them to run out of water very easily and expect the stream to always be flowing.

Those in the working class would have a creek flowing into their canyon. It would be steady, but nothing excessive. They would drive older cars, live in modest homes or apartments, and generally need to watch their money carefully to cover everything. At times the creek may slow and even dry up for a period of days. If you were living with a creek income, not being able to afford the things you need would be a concern.

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The truth is, however, that all of these individuals are equally vulnerable. All of the water flowing into the canyon flows right back out. Even for the individuals with the raging river income like a movie star, if there is a disruption in the flow of water coming into the canyon – like if someone builds a dam upstream (a job loss or an injury), they could very quickly be in trouble.

Now picture the same canyon with the same water source flowing into it, but now place an earthen dam at the downstream end. Now the water does not all flow out instantly – water starts to rise in the canyon, forming a small pond, then a small lake. Obviously the water level would rise a lot faster for the individuals with a raging river flowing into their canyons, but even those with just a creek would see water building up over time.

Now, these individuals are protected somewhat from an interruption in their income stream. When the water stops flowing for a period of time, depending on how far their canyon had filled with water before the interruption, they would have some buffer before they ran out of water. The amount of time they had would depend on how many holes they had in their dam – how many expenses they had each month.

Individuals who become wealthy – truly wealthy – build dams at the end of their canyons. They also limit the number of holes in their dams and work to increase the water source coming into their canyons. In fact they build additional feeder streams into their canyons, called assets, that build upon themselves to increase the flow over time This causes their canyons to fill with water and become large lakes from which they can draw and never worry about running out of water because of the feeder streams replenishing any water that they remove.

In this book you’ll learn how to manage your cash flow to build a dam at the end of your canyon. You’ll learn how to increase your income by adding feeder streams, assets, that will increase how much water is flowing into your canyon. You’ll learn the investments that you must make to pay for important things like retirement. And then you’ll learn how to set yourself up to never need to worry about money again. It all starts and ends with a cash flow plan.

 

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Finding the Right Stocks to Invest in


When I wrote and published the SmallIvy Book of Investing: Book1: Investing to Grow Wealthy, I covered a lot of the information on how to invest, including what the different types of assets are (stocks, bonds, mutual funds, warrants, LEAPs, REITs, and options) and what the risks are when you purchase these assets.  It also covers how to use investing, along with management of your money from work, to grow wealthy and have a good chance of becoming financially independent by the time you are in your mid to late forties, assuming that you start right out of college (or even in high school).


 

A question I would often get, however, is:

How do I find stocks to invest in?

To answer that question, let’s take a look at the type of company that you want to invest in, assuming you’re following the advice in  the SmallIvy Book of Investing: Book1: Investing to Grow Wealthy and buying great companies and planning to hold them for a long time.  If you’re instead planning to trade stocks – trying to time the market or find stocks to hold for a short period of time – I wish you the best of luck, because I think you’ll need it.  After several years of trying to do the same thing, I learned that I would have gotten a better return just investing in index mutual funds.  (See, for example, Bogle On Mutual Funds: New Perspectives For The Intelligent Investor (Wiley Investment Classics) to learn about this very sound investing method).  The way to have a chance to outperform the markets with individual stocks is to find great, growing companies and then plan on holding them of a long time, through good times and bad.

If the Loveless Cafe, near Nashville, TN were a publicly traded company, that would be the kind of stock you would want to own.  They have a top-quality product (fantastic southern food in a unique atmosphere) with few real competitors in the area.  They are fortunate in that a lot of people think they can cook and open southern-style restaurants, but most of them can’t cook.  Those who become chefs end up cooking fancier fare and also tend to open places in the bigger cities rather than out in the country, and therefore don’t compete. For more information on The Loveless Cafe, check out Meet Me at the Loveless or one of the other books below (just click on the image).

Part of the charm of the place is the location – it is just on the side of the road in what used to be a motel.  It is close enough to Nashville that people visiting the Music City can head out there for dinner after a day shopping and seeing the sites in Nashville, but it is remote enough to be memorable.  The remoteness also helps in that if you want a snack or a drink while you’re there, you almost need to pay the high prices they charge in the stores surrounding the restaurant since they have an effective monopoly.  (In actuality, there is a gas station with a store right next door, but they keep it hidden from sight on the property with hedges and such – smart.)  Having a lot of available free parking, to me at least, also is a draw.

More than just being a country diner, The Loveless Cafe is a name and a destination.  They can sell shirts, bags, and hoodies with their logo plastered across the front and people will pay high prices to buy them.  Think about that – owning a business where people from all over the world will pay you to advertise for you!  Few other restaurants have been able to accomplish this feat  Some examples include The Hard Rock Cafes, Planet Hollywood, and Joe’s Crab Shack.  There are other restaurants that are successful, but no one is going to pay to wear their logo.  In fact, most people probably wouldn’t wear something with their logo even if it were given to them.  Would you wear a shirt advertising Red Lobster, The Olive Garden, or Outback Steakhouse?  These are all great restaurants, but they are not destinations and tourist attractions in their own right.

As it stands today, The Loveless Cafe would not be a good investment as a SmallIvy, grow wealthy over time through growth, stock.  It would be a great income investment since I’m sure that the restaurant generates a ton of cash each year.  Even though their prices are very reasonable in the restaurant (not so much in the gift shops surrounding the restaurant), they pack people in every night from opening to closing.  The issue is that they currently don’t seem to have a plan to grow – they are happy just doing what they are doing in one location.  A great growth stock requires that the profit the make each year increases – not just that they do a lot of business.

The amount of income you produce is proportional to the number of people who you serve.  If the Loveless Cafe were to be sold to a family or a corporation who desired to expand operations, opening additional locations and also expanding the lines of products they sell directly to consumers off-of-the-web, they would then be instantly transformed into a great growth company.  So that is what you need to look for when selecting a company:

  1.  Find a great brand with few real competitions, at least in the same class of the company.
  2. Make sure the company has the ability to expand.
  3. Make sure that the company has good management. (Just look at their track record.  If they have had the ability to steadily grow the business each year while taking on a reasonable amount of debt, if any, they are good managers.)

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Use Individual Stocks to Increase your Returns


Perhaps you’ve been a mutual fund investor and have wondered about buying individual stocks.  For many people, mutual funds are all that you need.  They are easy to learn, easy to invest in, and really are a “buy it and forget it” investment.  Some people may wish to see if they can do just a little bit better, however, by buying individual stocks.  If this sounds like you, read on.

After many years of investing in stocks, bonds, warrants, convertibles, and other assets, I’ve come to find that most of the time, buying mutual funds is preferable to buying individual stocks.  It is often cheaper.  It is easier.  Most of the time you’ll do better just holding mutual funds.  There is one strategy, however, where buying a few individual stocks, in addition to your core set of mutual funds, can pay off big, and that is to take a few concentrated positions in the “best of breed” companies, and then hold them for a long time.

Let’s break that down and discuss what it means.

Take a concentrated position:  This is a trick I learned from JD Spooner’s Do You Want To Make Money Or Would You Rather Fool Around ?  When you take a concentrated position, it means that you buy a lot of shares in just a few stocks – you are concentrating your money in just a few places.  Many of the books you read or people you’ll hear on the radio will say that doing that is a bad idea – diversification is what you want.  The issue with diversification, however, is that it dooms you to getting the market returns at best.    It means that even if you’re a good stock picker, you’ll be buying the stocks you really like, plus a lot of other stocks you sort of like.  If you want to beat the markets, buy large amounts of just a few companies.  Just be sure you also put a good portion of your money into a set of mutual funds as well in case you turn out not to be a good stock picker.

Buy “best of breed” companies:  Since you’re concentrating, this means that you have the opportunity to just buy the stocks that you’re really excited about, not your first, second, and third choices.  Take advantage of this and avoid the temptation to water down your portfolio with some also-rans.  Pick the best-of-the-best, buying just one or maybe two stocks in a given industry.  Figure out which stock is the superstar of the group and go there.  Don’t buy into McDonald’s, Taco Bell, and Wendy’s if you think Wendy’s is going to dominate the fast-food market over the next several years.

Hold for a long time:  People will tell you that concentrating in stocks is risky, even if you’re buying stock mutual funds, and they would be right if you were buying for a month or even a year.  The issue is that even the best of companies will have a bad quarter or a bad year, and sometimes the whole stock market has a bad year because of factors outside of the markets that worry investors.  This is why you want to hold on for a long time to give the company to grow and show it’s worth without these other factors clouding your return.

Let’s look at it another way.  Let’s way that you’re cousin Guido, who is a fantastic cook, is opening a spaghetti restaurant and asks you to invest.  Would you invest $50,000 in the business, then expect to turn around in a  year and sell out?  You would know that it might take a year or two for people to find the place, or for word-of-mouth to get around how great your cousin’s marinara sauce is.  There might be a recession during that year where most places – good and bad –  see little traffic since most people start to eat at home.  And you really want to hold on and be there when he opens a string of 50 restaurants all over the country, rather than get out with $55,000 after a year, even if that is a 10% return.  If you’re going to invest in individual stocks, go for grand slams, not base hits.

If you’re interested in individual stock buying and this strategy, I go into far more detail in my book, SmallIvy Book of Investing: Book1: Investing to Grow Wealthy.  Check it out at the link below if interested.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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