Stock Investing for Cash Flow robert kiyosaki

Investing for Cash Flow

Make cash flow through the stock market

Many people invest in the stock market for capital gains, meaning they're betting on the price of something to go up. Unfortunately, today, many people aren't winning on those bets. Investing for capital gains is akin to gambling, only not as much fun. Instead of investing for capital gains, the wealthy learn how to invest for cash flow, even in the stock market. Any capital gains are icing on the cake, if they happen at all.

If you enjoy watching those “fix it up and flip it” TV shows, you’re probably already familiar with the concept of capital gains. Essentially, it’s the game of buying and selling for a profit.

In real estate, let’s say you buy a single-family house for $100,000. You make some repairs and improvements to the property, and you sell it for $140,000. Your profit is called “capital gains.” Any time you sell an asset or investment and make money, your profit is capital gains.

Of course, there are also capital losses (which occur when you lose money on a sale). The same concept holds true outside of real estate. If you buy a share of stock for $20, and sell it once the stock price increases to $30, that’s also a capital gains profit.

Most investors today are chasing capital gains in the stock market through stock purchases, mutual funds, and 401(k)s. These investors are hoping and praying the money will be there when they get out. To me, that’s risky. As long as market prices go up, capital-gains investors win. But when the markets turn down and prices fall — something nobody can predict — capital-gains investors lose. Do you really want that gamble?

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The Wealthy Invest for Cash Flow

Cash flow is realized when you purchase an investment and hold on to it, and every month, quarter, or year that investment returns money to you. Cash-flow investors, unlike capital-gains investors, typically do not want to sell their investments because they want to keep collecting the regular cash flow income.

To cash flow in real estate, you could purchase a single-family house and, instead of fixing it up and selling it, you rent it out. Every month you collect the rent and pay the expenses, including the mortgage. If you bought it at a good price and manage the property well, you will receive a profit, or positive cash flow.

If you purchase a stock that pays a dividend, then, as long as you own that stock, it will generate money to you in the form of a dividend. That is how you cash flow through the stock market.

Bigger Opportunities Than Dividends?

I’ve asked Andy Tanner, my Rich Dad Advisor on stocks, to step in and explain the exciting strategy he uses to first, investing for cash flow and second, realizing a capital gain using the stock market.

Andy Tanner

I'm going to take a risk with this blog post and show you some real stock trading and paper asset examples. Before I do, it is absolutely essential that I protect you and I protect me.

Understand, first and foremost, that I am not your stock picker. You need to be your own stock picker. I’m the guy that shows you how to trade with stocks, not what stocks to trade.


What would happen if I told you to go out and buy a stock for IBM and you did? You wouldn't learn anything. And if I said, “Hey, just go out and buy some gold,” and you did it. You wouldn't learn anything. That is lazy and worse, it’s dangerous.

What if I got hurt? Then you’d be in trouble.

Or what if I sold out and started only recommending stocks that paid me to make recommendations? You would be in trouble.

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We need to take responsibility for ourselves. We need to stop passing that job on to strangers. I am a teacher. I want you to learn how to take care of yourself and your family.

The purpose of this blog post is to show you how to cash flow stocks. Robert always talks about the CASHFLOW Quadrant. Why? Because the mission of Rich Dad – to elevate the financial well-being of humanity – is really found in the I-quadrant. The mission, in my words, is to help those in the E (employment) and S (small business) quadrant to the B (big business) and I (Investor) quadrant.

There is one thing that gets you from being an E or S to becoming a B or I. It is your knowledge. It's what you know. Today, I’m going to show you some wonderful ideas that were never taught to me in school… ever. And I'm going to give you some knowledge to move you to the B and I quadrants.

I’m going to show you one of my favorite trades. I'm going to show you how to get some cash flow. As I show you this trade, you’ll also see the difference between, investing in a 401k and investing like Warren Buffett.

Bond vs Stocks

And to do that, we're going to talk about several different types of paper very quickly. You have bonds. A bond is a loan. And the problem with a bond is they don't pay very much. They pay you a very small interest rate on the money you loaned them. The other problem is you never actually own anything. So I don't do much with bonds.

I like to invest in stocks, which are called equities. When you purchase a stock you purchase part ownership in a company. So if you bought an Apple bond, you wouldn't own any part of Apple. You'd just be loaning money. But if you bought Apple stock, you'd actually be a partial owner.

Derivatives: Getting paid to buy an asset from stocks

But we aren’t talking about bonds or stocks today. This post is going to show you a trade using a derivative. A derivative is a promise. A guarantee.

Most people in the stock market are not investors. They own a 401(k). Because of this, most people have to pay their hard earned money in order to invest their money. These people are not investors, they have no knowledge or education. They rely on strangers to invest for them.

And they are forced to pay strangers to take their money. That's how stock brokers and the big guys on Wall Street get rich. They take your money and charge you fees to do it. This is how Wall Street makes billions upon hundreds of billions of dollars off the hard working people that don't know how to invest.

escape the rat race with billionaire stock strategies

But not us. I’m going to show you how to get paid to invest. What that means is you are going to get paid to buy the asset. Confused? That’s okay.

You say, “Hey, I'll buy some stock.” And someone else says to you, “Okay, we'll pay you to do this.” What's interesting about this is you’re buying the stock anyway. But now some stranger is going to pay you to buy yourself some assets.

Let me explain with an example. I’ll use Facebook, stock ticker FB. This is what Facebook looked like months ago.

Simplified income statement and balance sheet

This was just after they came out with an earnings announcement. A couple things happen on this earnings announcement. Facebook said, “Hey, we thought we were going to make $1.84. But we did not. We only made $1.75.” But even more than missing their financial projections, they announced that they were having some problems with subscriber volume.

These two negative announcements created something called a gap down.

Facebook: The Biggest Gap Down in History

Facebook was at a high of $220 a share and then after the announcements the stock dropped, or gapped down to $117. It was in the news, and this was the largest market cap loss in history. In other words, there's been stocks that have gapped down worse than that. But because there are so many shares of Facebook available this gap down created the largest market cap loss in history. Roughly hundreds of billions of dollars.

A lot of people saw this and saw an opportunity. I’m one of them.

Let’s walk through my Facebook trade front and back. First, why did the Facebook stock value stop dropping at $171? Why didn’t it plummet further?

The reason is because this is where people started buying it. They started to buy it at that level.

In other words, they decided now was a good time to get into the action.

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But you know what, when's the next time I'm going to be able to pick up Facebook this cheap?

It's usually worth more than this. So, yeah, I think this is a great thing. Now, I do not try to predict whether a stock will go up or down. That is gambling. Instead I try to position myself to make money on a stock no matter what direction it goes, up, down, even sideways. So while I can't tell you and won't tell you whether it's going to go up or down I can say that I do not believe that Facebook will be going out of business in the next month.

So an average investor would invest for capital gains and buy Facebook while its price is low with the hope of selling later when the price is higher. That is what an average, amateur investor might do.

Okay, so I decided I'm going to buy 100 shares of stock in Facebook at $171. $171 times 100 means that we're going to spend $17,100. I am risking $17,100. If Facebook goes bankrupt or evaporates, I’m out $17,100.

Or, instead of buying at that price, I ask myself, “Andy, what price do you want to buy Facebook at?”

the wealthy invest for cash flow, even in the stock market - robert kioysaki

Well, I like to buy things at a good discount. So I look at my Facebook chart and I see that Facebook has, in the past, been as low as $162 a share. I like that better than $171.

But now I have a problem. $171 isn’t that low and no one is going to sell it to me at $162. I’m just going to have to wait and hope it goes down. Maybe, but maybe not.

Maybe there's another guy in this story. Someone who already owns some stock in Facebook. Maybe he’s scared. Why? He has just been through an annihilation. The biggest gap down in history. He probably bought it low and rode the Facebook craze all the way up to the top of $220. He thought he had it made. But now he’s thinking, “I just I've lost so much. I don't know how much more pain I can take. I gotta draw a line in the sand.”

So you know what he says?

“I want the choice. I want the choice to sell my Facebook at a guaranteed price. I want to be promised that I can sell my shares at $162 if I choose to. I want to be guaranteed over the next 10 days that I won’t lose more than I can bear. This thing's volatile, it just got crushed. I just I just want some insurance. I want someone to promise me that I could sell it to them over the next 10 days at $162.” This makes sense right? If you just lost a ton of money you’d want a way out too. You’d want a guarantee.

This is where I come in.

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I say, “I'll tell you what, here’s my promise to you. I’ll buy your Facebook shares if they drop to $162.” I give this poor broken man the choice, or option. That is what I’m offering this man. It's an option. Have you heard of the options market like the Chicago Board of Options Exchange (CBOE)? Well, that's what this is.

This is called a put option, because he can put this stock to me if he wants. And these happen every day. That's why we have a CBOE.

Stock investing for cash flow through put options

Now, should I do this out of the goodness of my heart? Or should I charge this guy some money to give him this promise to give him this guarantee?

Well, I looked it up and I asked, “What's the going rate for this put option?” Our stock investor replies, “I'll pay you $1.80 for every share. You'll do this for me, and I’ll pay you $1.80 times 100 shares, or $180.”

Now, that's not the most money in the world. I could do more than one contract if I wanted. I could do 10 contracts and make $1,800. That’s a house payment. But, let’s keep our greed in check and focus on knowledge and understanding this strategy.

So what did I do? I promised to buy something cheaper and I received $180 for my promise.

That is how I invested for cash flow using stocks.

Can I get a loan for investing?

Now, here's what's really cool.

Robert’s correct when he states that a banker will not give you a loan for investing in a mutual fund. They'll say no.

But, they will say yes if you want to purchase a stock. As a matter of fact, most brokerages will only make you put up half the money to do this.

Since I’m promising to buy 100 shares at $162 a share, I need $16,200. But, since the brokerage will loan me half, in reality, I only need $8,100. That's called leverage. I’m using the bank’s influx of cash to put up half the risk of my investment.

So we have $180 brought in from selling the option. We divide that by the amount of money we actually have to put up. Now we're going to have to put up $8,100 to buy that much stock in Facebook. That means we're getting 2.2% on our money in 10 days.

What if I do this every 10 days for a month? That means I can do this three times every month. 3 X 2.2% equals 6.6%. What if I did this for a whole year? Every ten days for a year. My return would be 79.2%.

That's amazing. And yet that is the reality. If someone told you you could get paid 79.2% on your money, to buy something that you wanted to buy anyway, at a cheaper price than it was today you’d think he or she was crazy.

But I’m not crazy. I’m just showing you exactly how Warren buffet makes a lot of his money.

You might say he’s crazy, and you would be right—crazy rich.

Stock investing for cash flow summary

There is a lot more to this trade. I would love to show you how to calculate the risks on a risk graph so you can go into trades like this one with enormous confidence. But a single blog post is a tough place to teach. If you’d like to learn more join me on my webinar where I dig into this much deeper and clearer.

One last word about stock investing for cash flow. There is no pressure to do these trades. I used to try to get my friends to do this but some people just can’t see it. They have fear in their eyes. Even when I show them the risk mitigation strategies and how to graph the risks, they just can’t take the action necessary.

I don't know if you know people like this, but there are probably people in your circle that no matter what type of opportunity you gave them, they wouldn't be able to see it. And so I've decided years ago, the best thing to do is to just say, you know what, here's an opportunity.

Well, here’s an opportunity.

Original publish date: April 08, 2014