Rich Dad Education Blog

One of the first principles taught to Robert Kiyosaki by his Rich Dad was the Cashflow Quadrant®. The quadrant is made up of the four different people who make up the world of business. The first box of the quadrant holds the E’s, or employees. According to Robert’s Rich Dad, these individuals could be identified by their core values, variations of the saying, “I’m looking for a safe and secure job with benefits.” These values can be identified in positions at every level of the company, from the very bottom all the way up to CEO.

Recent years should have illustrated clearly the fallacy of the “safe and secure job,” but that mindset undoubtedly will remain for millions of workers in America. Even if we assume for arguments sake that a person’s job is safe, the fundamental problem that so many individuals have in building wealth is that they simply are earning a paycheck. Individuals in our society often put long and tedious hours into the earning of that paycheck, and usually create a lifestyle to match the earnings of that paycheck. They invest their time into their core value of security, create a lifestyle to match their earnings, and get caught in the proverbial rat race of life.

Perhaps nothing can teach a person this concept more powerfully than the CASHFLOW 101 game. The game quickly exposes the myth that you can create wealth by building assets such as a home or cars. It also teaches you that, through cash flow, you can achieve your dreams, free up your time, and never worry about money again as you escape the rat race forever. This concept of cash flow is perhaps center among the many principles and concepts and taught in this game. The concept of cash flow, or passive income, is also a primary reason why so many people flock to real estate investing.

Looking Forward to Retirement

Many individuals who have core values centered around safety and security undoubtedly have social security and some version of a 401k at the center of their retirement plans. Many individuals in recent years have had to delay their retirement due to fluctuations in the markets, and have been at the mercy of larger financial instruments to dictate how they spend the golden years of their lives. Needless to say, this line of thinking is not in line with the Rich Dad philosophy.

The Rich Dad philosophy teaches that our retirement begins the second we escape the rat race and no longer have to work for money. Retirement in this sense is simply a state of being, as we may choose to continue to work, volunteer our time, spend more time with our families, or simply go surfing every day. The key is that we no longer have to work for a paycheck because our cash flow exceeds our current and long-term expenditures. Thus, our options on how to enjoy and spend our precious time on earth increase tremendously. This is the power of passive income.

Replacing Your Paycheck with Real Estate Income

It is likely that most of us still are in a situation where we are working for our paycheck. Perhaps we are an employee for a company or own a small business; one way or another, we are putting in the hours for the money we bring in. The process of transitioning from earning a paycheck to replacing it with real estate income likely won’t happen overnight, but it will happen if you have the dedication and acquire the how-to knowledge of becoming a successful real estate investor.

Bringing the dedication and willingness to sacrifice will be up to you. No one can find the inner strength or desire for you. Rich Dad Education offers numerous courses that can teach you the how to build passive income through real estate. In addition, over the course of the next several months, this newsletter will be focusing on real estate strategies that are centered specifically on building passive income.

How Long Does It Take to Escape the Rat Race?

There are too many variable to answer this question with a simple answer. If you have ever played the CASHFLOW game, then you know that if you played with four people, one of the four got out of the rat race first while it might have taken other players many extra turns before eventually getting out. There are so many variables in life, and when you couple that with all of the various levels of dedication and skill sets that people bring to the table, it is nearly impossible to calculate. We can take comfort in the fact that numerous people have done it in real estate, and the formula is logical and time-tested.

For example, one of the key principles in real estate investing is buying right. Motivated sellers are the key, and there are many techniques in which you can negotiate buying property for little to no money down in a deal that makes sense for both sides. While this principle is true, negotiation skills can vary from individual to individual, and some people will just have a knack for dealing with people. With all other factors being equal, these individuals will be more likely to escape the rat race first, as they finalize deals at a quicker pace. Fortunately, if you enjoy working with people, are honest, and can learn to communicate clearly, then you will have a heads up in this department.

Real Estate Passive Income

In the November issue of the Rich Dad newsletter, we will discuss rental income dealing with single-family homes, and in December, commercial real estate and apartment buildings. All of these areas are powerful tools to create passive income. For example, if you own 20 units that generate an average of $200 per month of positive cash flow, that would create $48,000 in annual net cash-flow. It is easier than you think to get to this point. Next month’s article will contain a step-by-step guide on how to get to this point.

$48,000 annually may not seem like the answer to make all of your dreams come true. However, I dare say that it is far more passive income that you currently enjoy. It could also serve as the foundation to escape that rat race so you could devote extra time to building additional cash flow and true wealth. Whatever you do at that point would be your decision, which is the point we all want to reach in our quest to escape the rate race.

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One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, this type of trader can analyze the market conditions, their own personal risk tolerance, and then choose the option strategy that best fits all criteria. Some traders find specific option strategies that work best for them, and others utilize numerous strategies dependant upon the market situation they encounter.

The key for any option strategy is to know in what market conditions to use the strategy, how to execute it, and whether the strategy fits within their risk parameters. There will always be a little terminology to learn with any strategy, but once you get the basics down, you will discover it becomes easier and easier with each strategy that you learn.

The Bull-Call Spread

The bull call spread is a popular strategy among many beginning investors for two reasons:

1) As a general rule, beginning investors are often more comfortable going with strategies that correspond with a bullish market.
2) The bull call spread has inherently less risk than other bullish strategies, such as buying calls. For this reason it is a popular beginning trade for traders that are comfortable in the virtual trading arena, and want to step into live trading.

For these basic reasons, beginning investors tend to gravitate towards bull call spreads as one of the first strategies they utilized. Even after time, many investors stick with bull call spreads as one of the go-to strategies in their playbook.

Traders short on available funds also utilize bull call spreads as it requires much less capital compared to buying stock or buying long calls. The premium paid for the long call portion of the trade is hedged with a written short call. Naturally, this limits upside profit, but those short on capital or who are risk adverse will take this tradeoff.

Stage One – Technical Analysis

You will perform the same general technical analysis with the bull call spread trade that you would for any bullish play. At a minimum, you want the two following market conditions:

1) A bullish broad market environment.
2) The underlying stock to also be moderately bullish.

If the broader markets are at least moderately bullish, and your underlying stock is also moderately bullish, then the bull call spread is a viable option strategy. Since we are dealing with probability, a bull call spread in a bear market is not a high probability play. In an extremely bullish market, or if a stock is setup to breakout through a resistance point, then a better play would be to use a straight call option as you would want to take advantage of those trade setups.

Bull-Call Spread Example

Let’s assume that you have identified that the markets are trending bullish, and the underlying stock, company XYZ, is also trending moderately bullish. You decide to execute a bull call spread. Company XYZ is trading at $32, and in order to execute a bull call spread play, you need to buy the lower strike price and sell the higher strike price. In this example:

You buy the AUG 30 Call for 300 (equal number of contracts for both sides)
You sell the AUG 35 Call for 100 (the sell side of the spread is always at a higher strike price than the buy side)

In this example, the net investment required would be $200. If on expiration day, the stock climbs to $37, then your AUG 30 call now has an intrinsic value of $700, while the AUG 35 call you sold has an intrinsic value of $200. The $500 difference minus the initial investment of $200 leaves you with a $300 profit.

If you are completely wrong on your trade, and the stock falls below $30, then both options will expire, worthless. Your maximum risk in this instance is the $200 that you initially invested to execute the trade. The upside and downside risk for any bull call spread trade can be expressed in the following formulas:

Maximum Profit Formula:
• Max Profit = Strike Price of Short Call - Strike Price of Long Call - Net Premium Paid - Commissions Paid

Maximum loss formula:
• Max Loss = Net Premium Paid + Commissions Paid

Different Strike Prices

Choosing what strike prices to use is a matter of personal preference, and usually is directly associated with your risk tolerance. In the example above, you buy the AUG 30 call on a stock that was at $32 and trending upward. You could just as easily:

Buy the AUG 35 Call for 120
Sell the AUG 40 Call for 40

Or you could also:

Buy the AUG 30 Call for 300
Sell the AUG 40 Call for 40

The only fundamental difference in any of these approaches is the amount of potential loss and profit that are available in each trade. There is no right answer, but as a general rule, a trader should purchase a strike price high enough to create a decent upside profit potential. Choosing the expiration month is also an important consideration that there is no universal answer to. In order to minimize the effects of time decay, a trader may consider buying a spread at least six months before expiration. This gives a trader time to be correct in their technical analysis.

Adjusting a Straight Call Spread

Straight calls and puts can be converted into spread plays at any time during the course of a trade. Let’s assume that a stock you had on your watchlist has been approaching its resistance point of $30 for some time. The stock then breaks out of the $30 resistance point, and makes a steady climb up toward $38. Your analysis of the chart indicates that you are still moderately bullish on the stock, but you feel that the chart indicates that you have captured a large portion of the breakout.

You can always close out of your position and take your profits, but there still appears to be bullish growth. You can convert this into a bull call spread simply by selling the corresponding higher strike price. You already own the $30 call, and by simply selling a higher strike price (in this example, the 40 or 45 would be reasonable options), you have created a bull call spread out of a straight call position. Options are amazing instruments for this reason.

The more option strategies you have at your disposal, the better equipped you will be to handle the numerous situations you will encounter as a trader. Next month, we will continue to explore option strategies by discussing the married put and the covered call.

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Earlier this month, iconic Oakland Raider owner Al Davis passed away. Football fans around the world owe a debt of gratitude to Al Davis, as the professional game we now enjoy achieved its success due in no small part to Mr. Davis’ work. Professional football lost a legend this month, and a personality that will never be replaced.

Al Davis spent his entire life doing what he loved. Upon graduation from college, he started coaching at Adelphi College, and spent the next sixty years involved in football. He is the only person to ever serve in professional football as a scout, personnel assistant, assistant coach, head coach, general manager, commissioner, and team owner. He was rewarded for his lifetime of service with induction to the Pro Football Hall of Fame in 1992.

In recent weeks, many media and football greats have taken the time to comment on the life of Al Davis. One constant in all of the tributes was Al Davis’ passion for football. Mr. Davis was not some dot com billionaire or oil tycoon who bought a team. He started as a simple coach at a college few people have heard of, and, at the time of his death, was the principle owner for the Oakland Raiders. He achieved this success because of his work ethic, vision, intelligence, and the fact that he loved what he did. The Oakland Raiders are estimated to be worth close to $1 billion. This financial wealth was quite literally a by-product, not the goal, for Al Davis. This is something that we can never forget.

Commitment to Excellence

The phrase commitment to excellence seems like a modern creation of corporate America. The phrase was actually coined by Al Davis, and has been used as a rallying cry for Oakland Raider fans, or better known as Raider Nation, ever since. I guess it shouldn’t be surprising that such a phrase was created by someone who loved what they did. If you have a passion for what you do, then it would seem natural to want to achieve as close to perfection as possible. As another famous football icon Vince Lombardi said, “Perfection is not attainable, but if we chase perfection, we can catch excellence.”

A commitment to excellence is a powerful slogan. But what does it take to incorporate this into our daily lives? Let’s define the two words:

Commitment: an obligation, promise, etc., that restricts one’s freedom action.

Excellence: the state of quality of excelling or being exceptionally good.

Incorporating the slogan commitment to excellence in your daily life is a pledge to hold yourself to the highest standards possible, and to expect the best from yourself every day. Living this commitment means the bare minimum is not good enough. In trading the financial markets, you may have gauged past success on how much money you made. A commitment to excellence dictates that you become the absolute best you can be as a trader. If you excel at trading, then the money will follow naturally. The same holds true in real estate and other entrepreneurial activities. You judge yourself by the quality of your ability, and not the end result. Financial reward will naturally follow these activities if you excel at what you do, but it is not the primary objective.

There is a second part to the definition of commitment, the part that “restricts one’s freedom of action.” If you are truly committed to excellence, then dedication and sacrifice are required. Dedication and sacrifice seem like ominous words when describing activities that we truly don’t enjoy. In real estate, if you don’t enjoy making offers or evaluating properties, or don’t love dealing with people, then three things are likely to happen:

1) You are unlikely to spend that extra time, thoughts, and energy necessary to raise your expertise level from mediocre, to average, to good, to excellent.
2) Your happiness and enjoyment level will be low, and you will constantly be tempted by activities outside of your “chosen” field that will draw your time.
3) You have a lower chance of being successful than someone in your field who loves what they do.

The same principles apply to any field. Those that love what they do have such an easier path to excellence than those that engage in activities they don’t enjoy. Time is precious, both in life and in business, and it seems so obvious that we should follow what we love.

The Video Game Principle

Many years ago, Gary Larson drew one of his Far Side comics of two parents watching their son playing video games. Above their heads were thought bubbles with dreams of classified ads that listed high-paying video game testing jobs for their young son. The cartoon was meant as a comical look at kids who apparently had no discernable skills outside of playing video games and a world where that actually never exists.

Let’s assume that the parents in this cartoon worried that their son had shown no interest in anything outside video games. Well, video game design is not only a high-paying job, but also a growth industry. Take it one step further, they could encourage their son to create his own game or his own gaming company. Or perhaps they could identify the attributes about games that draw their son, and point out similar careers. Is it the constant motion, the analytic skills required, or the constant evaluation of moving parts? Sounds like a stock trader to me.

Doing what you love does not give you a license to never leave your basement and play video games the rest of your life. However, never be afraid to think outside the box in determining what you want to pursue in life. Never limit those around you either, as it probably seemed silly in early 1950 for a graduate of college to say that he wanted to go coach football the rest of his life. I doubt few people around him gave him a chance to own a billion dollar franchise one day.

I am not an Oakland Raiders fan, but I will miss Al Davis. He was a rebel, a creative thinker, and a true visionary. He will serve as an inspirational force in people’s lives for years to come. There are two quotes that I have looked at every day since he passed: “You don’t adjust, you just dominate,” and, “Just win, baby.” It is a whole lot easier to win and dominate when you do what you love.

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