cash flow Archives

Financial Literacy to become rich

By Laxman Sonale February 13, 2022

Hello friends, I am Laxman Sonale, In today’s article we see the financial literacy to become rich from chapter 11:- ‘why must one invest’ from the book ” Stock To riches ” by Parag Parikh. In this chapter, you know the difference between rich people and poor and middle-class people’s income, their expenses. The most important how we become rich.

so let’s start

Previous Chapter 10

Chapter 11:- Why must one Invest:-Financial Literacy

In the starting, the author gives a quote on today’s situation.

“Modern man drives a mortgaged car over a bond financial highway on credit card gas.”

– Early Willson

In this chapter, the author talks about the basics of financial literacy. let’s see what he say

the author says, ” I would like to end the book with some thoughts on the paradigm of money and the basic of financial literacy. these concepts are very well explained in the Rich dad, poor dad series authored by Robert T. Kiyosaki with Sharon L. Lechter.

We are afraid of losing money, of not having enough to make. if you have a passion for anything you will accept by passion helps you to think positively. But when you do that you will never have enough money to fulfill your desires.

People believe that money can solve all their problems, but that idea is an illusion.

Remember when you were just out of college. you had certain desires to be fulfilled and certain bills to be paid. so you were thrilled when you got a job. (Financial Literacy)

you believed that the paycheque at the end of the month would solve all your problems when the paycheque arrived you paid the bills for your desires. you were happy about it, but this happiness was short-lived.

As soon as you fulfilled your desires, they increased and you required more money to fulfill your desires. they increased and you required more money to fulfill those new desires.

When you got a hike in your salary the pleasure was again short-lived for your desires increased in proportion to your income.

It’s a never-ending story and you are always afraid that you will never have enough. so every time you think of money fears grips you and you make decisions not with your mind but with your heart.

What you need to do is to change your paradigm. passion should drive you not to fear, think of what you can do with money and what you should do to make it.

money is an idea. you see it more clearly with your mind than your eyes. learning to play the game of money is an important step on your journey to financial freedom.”

after this explanation, then the author talks about learning the money game.

Learning the Money Game:- Financial Literacy

in this point, the author shows how money works for rich people, middle-class people, and poor people.

the author says, ‘ To be a successful investor you must know how money works, there are some elementary facts about finance that unfortunately are not taught in schools and colleges. (Financial Literacy)

so let’s begin, learning now

The question you should ask Yourself: What is an Asset?

Answer:- An asset is that which creates an income for the owner.

see the following image to understand better.

Question: What is Liability?

Answer:- A liability is that which creates an expense for the owner.

see the following image to understand better.

then the author gives the difference between asset and liability with bank examples

author says,” have you been approached by banks willing to lend you money to buy a house? Does your banker say he will help you buy an asset?

Attractive deals in the form of low-interest rates and long-term mortgage payments are offered. so you go ahead and buy your dream house thinking you are buying an asset.

By the definition of an asset, it should create an income for you. however, here it is creating on expense in the form of mortgages, taxes, interest, etc.

so common sense demands that you treat it as a liability rather than an asset.”

then, the author explains, why a banker tells you, a house is an asset.

the author says, ” Yes, the banker did tell you that you are buying an asset. what he did not tell you was that he was buying the asset for the bank and a liability for you.

There is nothing wrong in buying a house and mortgage, but understand that you are thereby creating a liability for yourself that will entail further expenses. even if you buy a house with your own money and kept it locked you should treat os as a liability as you are incurring expenses for its upkeep in the form of maintenance charges, property tax, society charges. etc. (Financial Literacy)

However, if you buy a house on mortgage and rent it, and your rental income is higher than the mortgage, then you have a positive cash flow.

House becomes an asset as it generates an income. Understanding how assets and liabilities work is basic to Financial Literacy.

Your cash flow is an indication of whether you are building assets or taking liabilities. if income is coming in your pocket, you have an asset, if income is going out of pocket, it is a liability.

Once you understand this you can work out your own financial future.”

then the author explains the Cash Flow of middle-class

Cash flow of the Middle-Class People:

In this, the author says, ” A majority of the customers of bank and consumer goods companies come from the middle-class. it is not because of their inherent purchasing power but because they happen to be attractive borrowers.

They are cautious about money yet, as they strive to improve their standard of living they get increasingly into debt. all their lives they work to pay off their mortgages, credit cards bills, car longs, etc.

they start small, like taking a loan to buy a two-wheeler, but soon their desires increase and they want to buy a car. so they go to the bank and take a car loan to fulfill their desire. with a bigger loan, the outgoings increase and they desperately look for a hike in their salary.

the hike comes and with it the desire to buy a bigger car. so the bank offers them a bigger loan. and this goes on and on. expense move and an increase in salary are soon nullified.

Only the liability increase; no-effect is a mode to increase the asset. they don’t realize that they have started working for the bank also ( by taking up liabilities.)

Now they work for two bosses. One who provides the job, and the bank to whom they give the interest, mortgage, etc?

this is the cash flow of the middle-class, which you will understand better from the following image.

As the income of the middle-class increase so does their liabilities.

they make little effects to create assets Instant gratification and financial illiteracy dominate their decision-making. they believe, they are creating assets in the form of houses, cars,s, etc. whereas they are only creating liabilities and increasing their expense. (Financial Literacy)

see the following image to understand middle-class people status quo

What differentiates the middle class from the rich is their lack of financial literacy.

it is the cash flow that makes all the difference the rich understand the power of money and they make it work for them. they always have a positive cash flow.”

then the author talks about the cash flow of the rich.

Cash flow of rich people:-

in this the author says, ” the rich create assets, the assets create income, from they create more assets. even if they buy a house on mortgage, they rent it and the rentals are higher than the mortgage and other charges they pay.

so the house is an asset for them even if they take a bank loan to acquire it. see the following image to understand better way.

the balance sheet of the rich consists of assets like stocks, bonds, real estate, etc.

their income derives mainly from dividends, interest, rental, etc. they make their money work for them and they do not create liabilities.

thus their expenses are under control. anyone can do what the rich do.

Firstly it requires discipline to stay the course and avoid instant gratification of desires.

Secondly, it requires an understanding of the basic principles of assets and liabilities. it’s easy to become financially literate if you have the patience.

some say that money begets money these people should have stayed rich, they lost only because they were not financially literate.

they did not know, how to harness the power of money. To become rich you must have a passion for money. Making money is a game and you must enjoy playing it. It is tough but worth the trouble.”

then the author gives fours ways of making money.

the author says, ” there are four ways by which people make money ad each method forms one quadrant of the income generation circle. (Financial Literacy)

different people fall into different cash quadrants depending upon the source of their cash flow.

Employee cash flow quadrant:- they work for somebody and earn a salary as employees.
Self-employed cash flow quadrant:- they are the professionals like, doctors, lawyers, architects who are self-employed.
Businessman cash flow quadrant:- they are the ones who own a business.
Investor cash flow quadrant:- they are investors whose income comes from investments.

to which quadrants do you belong.

whichever quadrant you may be, if you want to make your money work for you need to make every effort to get into the investor quadrant.

Only then will you be able to achieve financial freedom.

A lot of us would love to be in the business quadrant, but few of us are not blessed with the skills or the abilities, or the resources to run a business.

so the best alternative would be to take a share of the profits of the company by way of dividends and capital appreciation. to gain a detailed perspective on the above concepts I would strongly recommend to the read the rich had, poor dad, cash flow quadrant by Robert T. Kiyosaki with Sharon L. Lechter ( C.P.A.)”

then the author talks about the best form of investment,

for that, you can read this in the book,

buy the book from the following image link

So this is all about the chapter 11 summary of the book ” stocks to riches ” by Parag Parikh on Financial literacy.

One Up On Wall Street: Chapter 13

By Laxman Sonale February 13, 2021

Hello friends, in today’s article we see the different chapter 13 of one up on wall street. In this chapter, you get the quantitative part of one up on wall street book. So from this chapter 13, you get which term is important in the balance sheet for looking at investment. so let’s begin.

Previous Chapter 12:

Some famous Numbers:-One Up On Wall Street: Chapter 13

so come in direct point let start with Percentage of sale

1. Percentage of Sales:-One Up On Wall Street: Chapter 13

In a company you have to see which product is selling very fast, as well as the quality of sale, is increasing, means you have to found the product that product sale is maximum. So you have to see the how the percentage of the sale that represent of company. (One Up On Wall Street: Chapter 13)
To see the sale account and how much account of profit that product is given.

2. P/E ratio:-One Up On Wall Street: Chapter 13

so let see the famous ratio that is the P/E ratio. So while looking for the P/E ratio. and then don’t only look at the P/E ratio look also at the company growth, which means earning in growth and compare with them.
If the P/E ratio and company growth are equal that means the company is fairly priced.
So here Peter Lynch talks about the PEG ratio. If the PEG ratio is 0.5 then that company is very good for investment. (One Up On Wall Street: Chapter 13)
If the PEG ratio is less than one then the company is good for investment, and if the PEG ratio is more than one then that the company stock is overrated.
If that PEG ratio is more than two then don’t buy the company stock. So let’s calculate the PEG ratio
The PEG ratio = (P/E ratio)/EPS Growth
So author gives the other things about considering the P/E ratio. (One Up On Wall Street: Chapter 13)
The dividend yield is added with the long term and that sum is divided by the P/E ratio. If you get the ratio is more than 2 then is a good investment and if you got 1.5 ratios then it is also ok.
But if you got the ratio is minimum than 1 then don’t buy that the company stock.

3. Cash position:-One Up On Wall Street: Chapter 13

If the company has maximum cash on the balance sheet then that company is very strong. In the previous chapter, we see the how-to calculate cash per share.
So the author gives the example of a ford company, In company, the stock price is increased from $4 dollar to $ 38, and wall street investors think this stock is overpriced. so let’s see what happen
But in the company, $16.3 of net cash is present at that time, which means if you buy that stock you get the $16.3 cash per share is completely free. (One Up On Wall Street: Chapter 13)
So do calculations, : $38 – $16.3 = $21.7, so P/E ratio is calculate on $21.7 price not on $38 price. so the P/E ratio is about $3.1, so the P/E ratio is 3 which means is a very good P/E ratio.
Ford company also has another insurance subsidiary name is FORD CREDIT.
and his subsidiary earning per share is $1.66, and the same similar company that P/E ratio is 10. If we calculate share price, in that time market trade is about $16.6 in market. (One Up On Wall Street: Chapter 13)
So interesting things is that ford stick is $38 and net cash $16.3 and if their subsidiary trade is $16.6, so you have to do the simple calculation: = $38 – $16.3 – $16.6 =$5.
So you have to buy the ford company at $5, which means that earning per share is 7, and you give $5 so you get the $2 free.
So some company looks like ford but they have the above stuff inside on balance sheet, just we have to think like a businessman. (One Up On Wall Street: Chapter 13)
So author also gives another company example for comparison, let’s see the company name is Boin
it has more cash and their shares price is about $42, and net cash is about $27. so make calculation and you get = $42 – $27 = $15.
so hence no difference in both above company. So ford’s company type of opportunity does not come again and again. so sometimes maximum cash also not affect the company’s goodness, and also if the company has maximum debt or NOSO(Number of shares outstanding) that time also not affect the company having maximum cash. (One Up On Wall Street: Chapter 13)

4. Debt factors:-One Up On Wall Street: Chapter 13

debt factor is the most important factor for identifying the value of the company. So you have to look at the company how much debt or equity.
If 75% are equity and 25% debt, then this company is a good company.
If 90% are equity and 10% debt then this company is a very good company.
If 80% are debt and 20% equity then this company has the weakest balance sheet. So in this situation, you have to focus on the turnaround company, as special attention.
If the debt is maximum then the company can’t become a turnaround company. You have to see in the company which type of debt are they carrying. (One Up On Wall Street: Chapter 13)
one is bank debt and another is funded debt. If they have bank debt, then the bank sees your performance and they realize you can’t do better then they liquidate your company and take their money from it.
Funded debt is the type of debt in which there is no power to liquidate your company, which means you can get the time to recover your company as a turnaround company.
If you select a company then see which type of debt is present on them.
Peter Lynch gives the example of Crysler company, This company becomes the turnaround because they have government-guaranteed debt that is helpful to recover the company. If they have the bank debt Crysler company also can’t recover itself. (One Up On Wall Street: Chapter 13)

5. Dividends:-One Up On Wall Street: Chapter 13

Peter lynch give the example to understand the term of dividends, so let’s see
If any company stock price is $20 and giving a $2 dividend, then this stock giving a 10% dividend yield.
If its stock price is down to $10 and they also give $2 at this time also, means its dividend yield is 20%.
So this stock maximum people buy because this stock comes in the floor means this stock never go down by 10%. So if the dividend price is $2 means the dividend yield is high so people can’t go this stock is down.
If you buy stock for dividends, then you have to see the history of the company. In history, you have to look for 20 to 30 years. (One Up On Wall Street: Chapter 13)
In this period if the company misses any dividend. so this is very important because if you buy slow growers and they miss dividends, then this stock does not become double in number. so you are found in a trap. so always check for dividend yield. (One Up On Wall Street: Chapter 13)

6. Book Value:

In book value, you can’t buy the company because the stock is less than book value, so don’t need to buy the company stock. Because book value can be overstated.
It may be happening if the asset value is not that much seen on the balance sheet. If you buy any stock on book value then check the real value of the asset at this time and confirm that the value is the same as to see on the balance sheet. (One Up On Wall Street: Chapter 13)
If you do not see this then your strategy of investment is 100% fail.

7. Hidden Asset:

In the company, sometimes see are understated on the balance sheet. Sometimes parent company is very cheap than the subsidiary. so focus on also his opportunity.
Many times happen with a foreign company and their subsidiary, so the parent company is cheap than our domestic company.
So careful of any hidden asset, and also see any tax law carry forward point, this is also a hidden asset. Because you don’t need to pay tax in future.

8. Cash Flow:

Peter Lynch says, ” stock price $20 and annual cash flow is $4, means 20% return on cash. If you get the stock like that the stock price is $20 and cash flow $10, which means you get a 50% return on cash for this stock.
For this stock peter lynch say, sell your house and take the loan for investment purposes, because this stock is minimum in number. (One Up On Wall Street: Chapter 13)

9. Inventories:

If the company increases inventories, so this is a bad sign, and also if inventory increases as fast as sales then this is the worst sign for the company.
and also you see the companies inventory is placed at the corner of the parking lot, so that also a bad time. This company can become a turnaround, so for this, you have to wait for this but not necessary for this company if the company happens. (One Up On Wall Street: Chapter 13)

10. Pension plans:

If you looking for a turnaround then also look, in the company, there is also any pension plan.
If there is a pension plan that comes underfunded, means that the pension obligation is more than the pension asset, so this is the cause of concern. (One Up On Wall Street: Chapter 13)
To solve it first then you can invest in the company.

11. Growth Rate:

If you get a business that increases the price of the product is continuously and people also buy that company stock and they don’t lose market share also.
Most of the time this type of product is present in cigarettes, liquor, drugs, etc, so this is a good investment but one cause is that you have to focus.
When someone is died because of a product and they do complain against the company and in between that one person wins then, the company has to pay the maximum money for his penalty. so this risk comes in this company. (One Up On Wall Street: Chapter 13)
In growth rate author say if any company has a 20% growth rate and its P/E ratio is also 20, and another company has a 10% growth rate and a P/E ratio is 10. so let’s what is a difference in that.
20% growth rate company is good than the 10% growth rate, let’s see how.
If a 20% growth rate increase in earing after 10 years the earning rate is 6.19, and if the P/E ratio comes 20 to 10, still company stock price stays 61.9. (One Up On Wall Street: Chapter 13)
and another company that growth rate of 10 increase in 10 years, the earning is growing like 2.50 time, and if their P/E ratio stays 10 then the company stock price is 25.9.
So this is the huge difference between the 20% growth rate and 10% growth rate.

12. Bottom line:

Profit after tax is called the bottom line or also called net income.
So different industries have different bottom lines.
If Company is in the same industry and the profit before tax company to each other and if the company profit margin is increased by 2% so their earnings are increased by 20%. so this is a big factor.
If that company’s profit margin is high they have maximum chances of survival in bad condition because some little losses increase or profit margin is minimum then they are going down. But when this company comes in recovery, this company become the double or triple also, means if 2% becomes 4% 6%. (One Up On Wall Street: Chapter 13)

Remember:

If you want to hold stock for a good or bad time for the long term, then choose the high-profit margin stock. But you want to see a turnaround then look for a low-profit margin so this gives a good return.