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now Strategies for Cash Flowing the Stock Market

 Strategies for Cash Flowing the Stock Market

 Strategies for Cash Flowing the Stock Market this is the rich dad stock cast with andy tanner the show that kicks 401ks in the asphalt and teaches you to be the master of your own stock investing domain and heres your host greg arthur all right welcome to todays show i i was kind of thinking that todays show we should call how to do the impossible let me tell you why let me tell you a little story the other day i got into a huge fight with one of my relatives i i didnt mean to but i completely triggered this poor old man i was talking to him about what ive been learning on this very podcast and his face was furious his skin turned red from blood pressure elevation his forehead got all wrinkly and the heavy frown like smashed his eyes down and he was yelling so aggressively like he was spitting all over me i i didnt realize we were that controversial i wasnt even i wasnt even trying to be but but in his defense you know money is a super emotional topic and and he s screaming at me you cant do that because i was talking about what we what we learned here in stocks hes like no one can cash flow from the stock market its impossible oh and so i took a i took what robertos does and i was like i was like super cool not that roberts kong but i was calling grant is my relative and i said you keep saying you cant do that dont say i cant do that and it and it was kind of funny like his his anger like when like just dissipated like i think he turned to shock and i dont know if it was shocked because i was so calm while he was so mad because that that does freak people out or if its that he suddenly realized that it was his i cant attitude that was the thing that was keeping him from seeing how to do this but like it was actually pretty funny his mouth was wide open he was speechless and you know a lot of things we talk about probably our listeners have that same initial reaction that that that you cant do that that you cant create cash flow from stocks but the reality is that if you understand how to stop seeing stocks as just investments and looking at stocks as a business like youre going to talk about today andy then well you know what i dont want to steal your thunder so lets bring on andy tanner andy welcome to andy is the genius of this podcast boy you must have uh you got a pretty low bar if you call me a genius grug we know that i do call you a genius you are you are the man and by the way andy no pressure but my relative will be listening today so oh this is well this is good well i welcome uh him because uh uncle frank yeah uncle frank its not about winning an argument its um just about discovering new things and maybe a different perspective and chances are uncle frank will say oh yeah i know that right i mean thats probably what hell say at the end says oh yeah that makes sense lets uh lets talk about this um theres a sign on my wall right there all right im not in mirror mode youre at youre right there all right and its a quote by charlie munger charlie mungers warren buffetts business partner and uh hes quite wealthy along with buffett and hes in his 90s this is a wise old owl and he said uh right here he says if all you do if all you succeed in doing in life is buying a little pieces of paper right if all you do is see it in life is getting rich by buying a little piece of paper its failed life life is much more than being true in wealth accumulation and whats interesting is sometimes in all this paper on wall street derivatives and carry trades and things value can get lost real quick and so if we by saying you know what is an asset well we can look at it selfishly and we can say an asset is something that i buy that puts money in my pocket and an asset takes money away from me i can look at it from that selfish standpoint what does it do for me just to correct you a liability takes money excuse me i see an asset you did oh my fault and thats the genius yes i appreciate thats why we have two of us exactly so an asset is something i buy that i that puts money in my pocket an asset or a liability is something i buy that takes money out and thats a very selfish standpoint but if you really look at the wealthy we might talk about investing as a word in invest in means i put something in first before i get something out invest kind of means im im vested im im committed im im in there and so if you look at the people that are wealthy and you say you want theres a lot of rich haters out there but im really grateful for steve jobs steve jobs built this thing called an ipad and my sons are measurably smarter than i was at that age because they got one as they about the time they could talk it was so intuitive for them to just swipe and move and and they spend maybe too much screen time i dont know but they spent a lot of time learning yeah and they have a window to the universe you know through that little thing and i think you blessed it i love itunes because when my wife and i go for drive we have podcasts and we have music and last night we watched a movie uh using our apple tv so hes brought a lot of value to my life so lets talk about the value question perhaps um you know an asset could also be hey this is the way that i bring value to the world when you are a real estate investor theres theres some things people really need on the hierarchy needs food clothing and shelter and im very proud um to be a landlord you know i think one of the properties we have im near what kenny or robert has but i think one of the properties i have and i dont know all the tenants because we have properties out of state and syndications but the ones that we own personally one of them is a retired lady whose husband passed away from cancer he was an air force vet and it was the home they built and that home was about to be foreclosed on that a predatory loan and i went in and i wrote a check for that house and i bought it with cash and it says lets get this out of the control the bank and i rented it back to her for the same payment she needed she got to keep her house now its my house now but its her garden its her pictures on the wall its her secure feeling and she never has to worry about having the rent raised as long as she lives ever shes inflation doesnt affect her now because im gonna take care of her right um i have another house that has a single mom in there with three kids trying to make it happen we keep that rent as stable as we can and so i feel im giving value to the people that its just i dont feel like im burger meister meisterberger uh just misering you know an asset who puts money in my pocket i think theres some value there well when it comes to stocks lets talk about what a stock is if i were to ask you what is a stock youve taken the four pillars class um what do you think stock is i would say its a sliver of ownership of a business yeah its like a pizza you know you cut it up into shares and you share the pizza and so someone s a business i have private businesses that are not publicly for sale but they still when you incorporate they say how many shares of this business mine has right and pull the number it could have been two could have been fan we said fifty thousand so when marcy gets smart and the bigger better deal comes along which i dont cant believe she must not see him because theyre there every day when she decides to execute that exit strategy and sell his businesses she has shares and i have shares and she can take her shares and off she goes so yeah its ownership of a business now lets think about that for a minute and lets talk about owning stock as a business warren buffett who i think is the greatest investor of all time now bezos has more money than he does now and so does gates theyre both businesses but those guys are entrepreneurs um as far as investing goes i think buffetts the top of the food chain because his business is buying other businesses right thats what berkshire does is its a holding company and hes basically been very shrewd in buying not little pieces of paper but buying companies and ill tell you what he said on cnbc uh just a month or two ago a couple months ago he uh they asked about apple and he owns a ton of apple i mean a lot and he said i dont think of apple as a stock i think of apple as our third largest business the largest business he has is geico thats a huge business and thats not for sale he he owns all the shares of that all of them berkshire does uh basf i believe a railroad is probably a second business and apple is the third largest business he has and it might even be bigger than that now that apples so high it might be you know like percent of of what hes got now at least in in the stuff he invests in shares so he said this he says i dont look at it as a stock i look at it as our third largest business thats an important point because since geico has no stock price how does that cash flow in other words how does he make any money this is what i would say in very humble because his uncle frank older or younger than you or same age hes quite a bit older quite a bit older so well be respectful with all respect uncle frank um you know how does warren buffett count geico is his largest business well ill tell you that business gives value to customers they give a fair price they insure motorcycles they insure cars their commercials at times can be entertaining but not usually they do give some value they give some peace of mind you know what if someone wrecks their car theyll pay it theyll pay it and they theres value in insurance im grateful for the people that provide insurance people say all those rich insurance companies okay let them find no insurance what happens when your home burns down i just like the peace of mind knowing that when i leave if this place burns down ill be compensated and there they basically have taken all the risk off my hands you know if i have a car and i total it thats their risk not mine because its insured so thats value thats not just manipulating little pieces of paper thats value and if geico doesnt have a stock price if it doesnt have a stock price then how uh how does he make money if he doesnt cash flow well the answer is he does and the word we use with a nonstock business is the word distribution so youve had businesses greg i have ive had businesses and the largest uh portion of my income comes from distributions not the salary i pay myself right absolutely i pay myself a salary that is fair right so the irs doesnt come after me right but if we uh have a distribution thats a thats a big amount of cash flow that comes well i dont know big is a relative word the bezos wouldnt be big so right for me i think its big uh i should say significant its meaningful to me right and so when uh cash flow means moneys moving and uh cash flow is based on your bank account you have assets uh the balance sheet right you have the balance sheet assets and liabilities you have the income statement which is your operations and then you have a statement of cash flow and your statement of cash flow discusses three other statements it discusses the income uh that comes in and out of the balance or of the income statement thats called operational cash flow so thats cash flowing you have asset cash flow which is investment cash flow that shows what goes in and out of the asset column then you have a financial cash flow which is debt what goes in and out so if i borrow money thats cash flow in to my bank account if i pay off a debt cash flow goes out if i buy an asset cash flows out if i sell the asset cash flows in and if i have operational cash flow and my my expenses are less than my income im going to have cash flowing in so thats what cash flow is so when you say kenya cash flow stock market lets begin with warren buffett and geico they have customers those customers pay for value if they dont have too many claims then theyre going to have premiums that that create profit and they can take distributions so um so thats his largest business now lets look at apple and the pro and i understand the problem greg is the problem is wall street and high frequency trading that you know kind of takes away this idea that that we have eighty percent of our stock market volume now is done automatically not even a human involved its all electronic of it now and some of this is done in nanoseconds or microseconds or whatever those tiny little seconds are and theres probably not a big fundamental change meaning fundamental analysis in you know the snap of a finger i mean geico didnt change much right there there well geicos not being traded all the time but apple is and so when you can trade in microseconds and fractions of pennies um you know i get it you know it doesnt its its buy low sell high in these little increments the 401k doesnt cash flow and so people think well how big is my 401k and they think in terms of buying low and the growth of the stock price right but i will tell you one of the most under appreciated aspects of being a stock owner is your potential for distributions but they dont call the distribution they call the dividend which is the same thing think of it if you and i and a bunch of friends were playing cards what would you do youd take out the deck and you would distribute or you would divide the cards its the same thing distributing the cards amongst five guys dividing the cards amongst five guys the same thing so a real estate for example when uh when i have real estate its as a business and i have two types i have um maybe an entity where i own a single family home that i rent and thats its own entity if i want if they pay rent i want to pull some of that money on spend it i take a distribution and theres only you know two shareholders me and my wife right right um the other ones are syndications where theres a ton of investors i mean these are you know million million dollar projects so a lot of us band together and when rents are paid they distribute that rent to us monthly in in cash flow so whats the difference between geico apple and uh rental property at a high level there is none theyre all businesses they just sell different stuff on the high level yeah i can tell you that that uncle frank told me that the dividends are pennies and they dont even count well benjamin franklin once said and hes older than all of us a penny savior pay earned i disagree uh with that because i believe in inflation you see the reason real estate is cool is is i believe as the dollar loses value rents going to cost more now certainly my maintenance will cost more certainly uh the insurance on the home will cost more but the cash flow will increase as the dollar is value i feel the same way about a can of cocacola yeah its going to cost more to put together but its were going to charge a lot more in the vending machine and the cash flow is going to be there and so i understand what uncle frank is saying if i were to bring up you know any stock right now uh youre going to see anywhere from one percent to six percent you know maybe you got you know i was looking at prudential today theyre paying like a six point eight percent dividend based on their price today for per so heres prudential which is insurance and geico right its the same business theyre paying about a six point eight percent dividend all the way down to you know cocacola whos paying about a three percent dividend but heres what we we want to consider when i ed my personal business it was very very small we ed it with my business partner we ed with zero money absolutely none and we each had a credit card and and we said well lets buy a website and doing stuff on business and so we spend a couple thousand bucks on a credit card next thing you know uh we had business so we we literally ed with none of our own money we used credit cards uh to do everything no money left our pocket at any time and uh that was pretty special to with nothing well the distributions of that time were pretty small uh you know pretty meager but over time they get larger if the business does well so if you look at stock as a business that would be a great title for this podcast investing in stocks is a business with a business mentality um warren buffett purchased uh his share his first shares of cocacola in and his average cost basis for all the coke hes purchased is about three dollars and cents now id imagine back in i dont even know if coke paid a dividend back then but back then it was probably three cents a share four cents to share those pennies now their dividend is like a dollar forty eight something like that i could look it up and get it exact i guess we should um ko a damn ill just look it up here on my computer real quick its a dollar sixty four excuse me i was off dollar sixty four so think about this for a moment if warren buffett is receiving one dollar and sixty four cents for every share he owns and he bought those shares at three dollars and cents on average thats a percent return every year on his money just on the dividend yeah thats a year that means that hes getting his whole shares paid for uh every two years hes an infinite return right hes hes had all that money paid back and that hes got a lot of shares but heres the thing theres the dividend yield but then theres the investor yield and and sure a person in any business has an eye of faith and when i ed my business it was an eye of faith if they do well when i when i ed my real estate investing career it was with an eye of faith that well do better in the future than were doing right now and if i just ed my business and my first distribution was going to be a forecast of what all the distributions would be i wouldnt get in the business either right i wouldnt but see were taking this as a business standpoint i will tell you that in a literal sense cocacola has ip enter you know intellectual property they have uh they have their secret sauce their recipes they have workers they have a workforce that is trained they have factories they have trucks and district they call it a distribution company a bottling company they have manufacturing um thats a real asset thats real stuff thats not a piece of paper and warren buffett when you take the attitude of buying a company believing its dividend will increase that means you bought it low but over many years that dividend will increase i bet if we looked and invited uncle frank to dinner you know a nice friendly dinner we could look at if hes older than me im a half century old so i remember ill bet the dividend grew significantly but warren buffetts cost did not thats real key because he paid for it once right right his cost did not increase and because he invests well and has a good tax you know im sure he has a great tax guy i mean hes gonna pay some taxes but thats a great idea and and you know you look at apple uh it doesnt cash flow a lot right now relative to its dollar price but buffett bought it not too long ago like i want to say like four years ago buffett bought it and uh and he uh he bought it i think at something like that bucks so we bought it half price ago so as their profits grow and that dividend increases his cost does not and the cash flow becomes actually quite significant in the case of coke its fifty percent can i interrupt you then so generally we talk about investing and getting educated and knowledge and we we tend to pull back away from speculating but it sounds like theres a i think i still indulge once in a while but yeah the core stuff no yeah but warren buffett here i mean the success stories here yeah he got the dividend but its the speculating that the dividend was going to grow that made it such a great story today is that is that a big part of when you focus on dividends to learn the first bit we have four pillars we talk about often the first ones fundamental analysis and fundamental analysis looks at a couple of things for buffett and graham you know benjamin graham they talked a lot about growth um whats its trajec trajectory you know is it growing and then it talks a lot about earnings you know is the thing earning money now its its a little bit more of a pipe dream to say well someday well make some money and those pay off big when they do but they have higher risk so hell i say hey lets get proof of concept um theres a few people i i was excited for my little business i mean we one of our one of our businesses is we offered stock education and we went to vietnam and uh we had like students want to be a part of our academy and they dont even speak english and what i know is is thats a good enough sampling that i know that if theres a hundred people in vietnam interested on our first go around and theres probably a thousand maybe ten thousand potentially interested right so i have an eye of faith in that in that look in that proof of concept right oh excuse me my phone but uh but thats a big deal right is youre right fundamental analysis so i would say uncle frank heres the deal warren buffett lets lets pull him into a meeting with warren buffett and lets take buffett to dinner too and he says you uncle frank i kind of like you tell you what im going to leave you and name you as a beneficiary of my uh trust beyond the grave in other words when i die ill make you beneficiary but heres the only thing you cant sell my cocacola stock but you can enjoy uh any portion of the cash flow from that that it gives and you get to choose i think you take the deal i dont think hed look at warren and say oh you cant cash flow stocks therefore that thats not a good offer for me this fact that offer would make him a millionaire uh like that fast because there is cash flow and so thats an important thing now what do you count as cash flow lets go two more levels with this um have you ever heard of theres theres a company called toll brothers have you ever heard of toll brothers uh no they are toll brothers tool brothers is a major major major construction company okay and toll brothers builds beautiful homes im looking if you go to their website tollbrotherscom youll see a beautiful home on the website and there it is toll brothers so is toll brothers a real business absolutely so what do they do build homes they flip homes they take they take raw materials and combine them together to make it worth more than it was before right the concrete was theres no atoms being invented here there was concrete over here and there were shingles over here and there was a canopy over here and all and there was a piece of land over here and all that stuff was worth x amount to buy it and then they did some stuff to it and then they uh sold sold homes theyve been doing this for a long long time and when they sell a home theres a margin there and because they do this well on a regular basis theyve been in business for a long long time and even a guy who hates flipping like kenny mcelroy well kenny mcilroy he does development he just holds it and rents it instead of selling it so toll brothers is a real business they just flip houses they call it development okay i have a friend named than merrell whos flipped about a thousand houses in his day he does about a hundred a year but heres the difference hes not some idiot out there with no education hes got systems hes got marketing hes got knowhow hes got relationships and you know what he does is he doesnt do development he does redevelopment in other words he takes all those parts and he does some stuff to him and increases the value and sells it sometimes he also rents so he has a company called ct homes theyve been in business for years something like that thats a real business its cash flow every year its cash flow in the down times some of his best times for and eight and so if you were to do the same thing as a stock um then youve got a guy who solved the market called jim simons jim simon ed a business its registered it has a uh its a real hedge fund but he took the opposite approach from buffett and he bought low and sold high and he counted that as cash flow and yeah its capital gain but cash flowed into his account remember a statement of cash flow has three things operational cash flow which we rent investment cash flow which would be buying or selling the asset or third is investment or financial cash flow is when you borrow money so you can cash flow from any of those three standpoints and stock investors uh if you look at their statement of cash flow if they buy a stock low and sell a high youll see cash flowing into their account and that is cash flow so thats an interesting uh way to to think about it uh as well is you can uh buying low and selling height is a form of cash flow its not my favorite its not the what we teach at rich dad by and large we like the idea of having a of not having to play that game of guessing i think thats a wise thing i think rich dad has established themselves as pretty wise were saying look endure the ups and downs of cocacola get the dividend because longterm probably does well okay endure the ups and downs of the real estate market but just collect your rent during the whole time right right and get the cash flow its not buy hope and pray we dont buy and hold real estate and hoping the price the real estate goes up we buy and hold real estate because the rents will come in over a long period of time and the rents will get bigger we dont buy and hold cocacola hoping the stock price will go up we buy and hold cocacola hoping theyll sell more drinks years from now than they did today does that make sense yeah yeah i explain it to my to my family members as im a lazy investor i dont want to have to keep finding the new house now i want to only find one house and just keep making my money theres some truth to that theres some real truth to that um the only way a person should really flip houses is they enjoy it some people enjoy the ugly the beautiful bringing the new family that he gets them off me not so much um i i enjoy a little bit of speculation in the stock market i truly do i had a choice experience i mentioned to you that my where we decided to homeschool my son this next year uh between eighth and ninth grade and i thought you know why wait till the fall if were going to do it were not on the school schedule anymore we can learn whenever we want to so we actually ed in the summer and weve been doing summer school and it was fun because yesterday im sitting here my this is this is the captain kirk chair see this is this is where you drive this is where you drive the enterprise from right this is the captain kircher all right so my son is in the captain kirk chair and im back here in spocks chair you know doing this thing and i and i just watched my boy uh set up alerts on every single position that that i have real stuff not a paper trade account real stuff and how did he learning and im watching him over shoulder learning real stuff so is that work i dont know we kind of have fun with it so work is a relative thing and i do like a little speculation we have the core stuff that we buy and want the dividend and you know we want to do same thing warren buffett do with coke heres the beautiful part about it is uh i cant like take my degree from college and pass it to my son and you know all the jobs i ever had you know i i did carpentry i was a rough framer uh you know did a lot of different types of jobs i cant leave those to my son whats interesting is the assets that im buying now i can be quite to my son we can do it in special trusts in the family trust where hes a beneficiary and we dont have a lot of problems in taxation and stuff and my sons can be stewards of those little machines that crank out the cash flow and just imagine when you think generationally about the cash flow yeah its a pittance you know its a pittance its pennies on the dog what about to my great great great great grandson because i think well still be addicted to cocacola by the time i have a greatgreatgrandson at least two greats at least two and the dividends that those stocks will likely pay that great great grandpa andy bought that will be significant cash flow when you think in terms of legacy so theres a lot of things to think about when we talk about dividends and theres a lot of things think about when you think about people who have a business buying so hedge funds are businesses that buy low sell high and the cash flow comes to the investors it comes in the form of a distribution right so you can cash flow stock market then third we havent talked about this is uh i have an insurance business and my son is learning about that um you know we rolled some options today and we had a meeting this morning my son you know helped me roll these options at years old and so an option is when i make a promise so i make people promises all the time and they pay me for those and just like insurance a premium they make you a promise oh your house burns down i promise you well pay you good good heres your premium so i can not only cash flow stocks with the dividend but if i decide you know what you give me an offer i cant refuse you know maybe the stocks a hundred dollars today and you offer me im like you think its going to go up in a month if that happens ill sell it to you well then you pay me a premium where does that money go it flows to me thats called cash flow the cash flows to me and i love to do that just outside of their reach right absolutely just outside of their reach you know oh it went to went from to i get the eight dollar gain i said hey you want to buy burner tim no not if its well i keep the premium so you know theres many ways to cash flow the stock market um and one of them is investing uh and think of this as a business go back to geico fruit of the loom dairy queen some of warren buffetts companies that are not for sale sees candies these companies are not for sale theyre not shared among the public theyre not public so does warren buffett get up in the morning and say gee i guess i better sell my company because thats the only way to make money in it no he says lets sell some candies candies well sell andy a blizzard well sell him some duracell batteries uh well sell them some fruit aluminum underwear and geico think about that warren buffetts got my money i mean i got duracell batteries sitting right here and when i bought this duracell battery that cash flow went to warren buffett right and just because duracell is not publicly traded doesnt mean it doesnt cash flow as a business and yet i have an iphone here another uh business that buffett owns and he did cash flow that through a dividend it doesnt matter what the stock price is so so there you have it i got one comment and one question for you yes one of the comments that you kind of hinted to you didnt use these words though is possibly when youre interested in dividend investing you need to also be able to have delayed gratification because its possible that the real rewards come decades years decades later when when then the ratio really looks like a brilliant move it sounds like that im not that patient right um you know i teach in my course the four pillars investing i use kraft heinz as an example kraft heinz has too much debt on their balance sheet blah blah but ill tell you i love that company because i just love ketchup and i think regardless of their debt situation youre going to have kraft macaroni and cheese and heinz ketchup and all right of potato chips and you know every french fries i mean they have they have like tons of philadelphia cream cheese theyre the fourth largest food company in the world i believe i just think theyre going to be around and what i did greg is yeah i bought some of that but i also used that option thing so i double dipped so i did get immediate gratification because i had five dollars per share of option money from selling puts to acquire it before i even ed so uncle frank what that means in english is that that stock was dollars when it fell bucks when i was trying to buy it and ive already got five dollars cash flow my cost basis now is bucks lets say just for numbers okay its actually right now about and i think we own it probably in the teens somewhere is where that is so because i brought in cash flow from selling options i got paid to buy it think about that i not only get cash flow once i own it i got cash flow because i got paid to buy it yeah thats crazy and thats immediate thats a thats an immediate gratification this is a family show so i wont say its like having an orgasm i wont say that but it is immediate gratification when you boom when you just get that hit right there and and and next thing you know so i love to double dip that game and it does its not like you you know well no this is what i hear not everyone can do that which is back to your point exactly not everyone can do it right all right everyone could but not everyone can and thats different like you said on one of our first shows do i have my aunt somebody do this no because she hasnt been educated how to do this there you go education is always the word that comes back on this podcast what a great conversation greg thanks so much thank you andy i really really appreciate it you and your brilliance invest as a business all right thanks man good luck to you next week Music you '