Saturday, August 23, 2014

Book Review #10: Cash Flow Quadrant: Author: Robert Kiyosaki

Key Concepts: Cash Flow Quadrant, Seven Levels of Investors, Be-Do-Have

From the perspective of a blogger who is reviewing a book to identify useful concepts to write in his blog review, books written by Kiyosaki makes a difficult read. 'Cash Flow Quadrant' is Part 2 of the 'Rich Dad' Series. The first one was 'Rich Dad, Poor Dad' reviewed here. It took me a long time to read this book (Cash Flow Quadrant). Finding a fresh concept in 'Cash Flow Quadrant' (which is not present in his earlier book Rich Dad, Poor Dad) is a difficult endeavor.

This is the second time that I am reading this book. First time I read it was when I bought 'Rich Dad, Poor Dad' and was very impressed with that book. Flush with enthusiasm, I purchased 'Cash Flow Quadrant' and was impressed by the simplicity of the points made in the book.

I am not as impressed with Cash Flow Quadrant the second time reading. I guess that now I am more experienced in investing and book review, having reviewed 10 books on Finance till now, with this being the eleventh, despite what the title of the post says. 

Based on their primary source of cash flow, people can be classified under one of the four Quadrants E, S, B or I. Quadrants E and S are on the left side and quadrants B and I are on the right side of the cash flow quadrant. The quadrant E stands for 'Employed' and covers people who get their primary cash flow from Salaries. Quadrant S stands for Self Employed, whose primary source of cash flow comes from personal services they provide to the customers. Quadrant B Stands for Business and Quadrant I stands for Investors, whose primary cash flow comes from their cash generating assets. 

Kiyosaki's noble life mission is to move people from E and S Quadrants to B Quadrant and finally to I Quadrant through the tool of Financial Literacy. The book mentions the differences between the people in various quadrants in terms of their thinking and language used. People in E Quadrant are Risk averse and their language is more about Salary and benefits that they can receive from their employer. People in Quadrant S are perfectionists and like to do the work themselves and do not trust others to do the work with the same quality as they deliver. They use words like 'hourly rate' and terms related to their area of expertise. B Quadrant are business people who discuss ROI and employing workers in their business and persons in I Quadrant talk of P/E (Price to Earnings) and P/B (Price to Book) and so on.

As you can see, if you want to move from one quadrant to another, you have to unlearn many a behaviour and learn new behaviours and language. The implicit assumption in this book is that people on the left quadrants are dissatisfied with their current state and will want to move to the right quadrants. What holds them back from transitioning to the right quadrant is the lack of Financial literacy which is one of the key skills required to be successful in the the right quadrants of B and I.

As mentioned above, to move to the right quadrants, one has to change one's behaviour. This can be achieved by changing one's thoughts. As per Kiyosaki, most people, when they want to achieve a goal, works in  the Have - Do - Be framework. For example, to achieve the goal of weight reduction, People go on a crash diet and once the goal is achieved, they go back to their original bad habits that increased the weight in the first place. The optimal framework for long lasting change is Be - Do - Have. First you have to BE. You have to change your behaviour and the cultivate positive thoughts in your mind. Next is to take action (DO) to achieve the goal (HAVE). 

For instance, to move to the right quadrants, you have to change your behaviour by becoming frugal and being aware of your spending. Taking steps to attain financial literacy and taking the first step are the crucial actions that are necessary to change quadrants.

One crucial point that the author makes is that one can work out of more than one quadrant at the same time. However it is important that one of those quadrants should be on the right side. The recommendation is to move to B Quadrant before moving to the I Quadrant which is presumably the holy grail of the Cash Flow Quadrants.

Author classifies Investors into seven levels. Level 0 includes those who do not have any money to invest since they spend all that they earn. They may be professionals who earn a lot but still they are Level 0 since they spend all. Borrowers form Level 1.  They borrow money to solve their financial problems. These people are neck deep in debt. Level 2 consists of Savers. These people have money to invest, but they are highly risk averse and invest their savings in low yielding fixed income securities. Primary objective for Savers is future consumption (buying TV, taking that Vacation) etc. 

Level 3 consists of the so called 'Smart' Investors. They are aware of the need to invest. However, they lack sophistication. Level 4 are the long term investors. They know that they need to invest, they have a long term plan and are actively involved in their investment decisions. They have wealth accumulating habits. Becoming a level 4 investor is the first step to attaining financial freedom. 

Level 5 consist of Sophisticated Investors. These people have good money habits and are investment savvy. They are focused investors with a track record of winning on a consistent basis. They are financially literate and aware of various investment options available. Most importantly, these people know that bad economic situations provide them with the best investment opportunities. The final Level, Level 6 is that of Capitalists. These people are more often a B and an I. They create deals that Level 5 and Level 6 investors buy. They make other people rich and provide employment to many. 

The last section in this book details Seven Steps to your Financial Fast Track. Each step is followed by a set of specific actions that one can follow to put the step in practice. The first step is 'Minding your own business'. This is a very important concept. If you are a salaried employee, you are actually minding your employer's business. Every line of expense in your personal income statement is making someone else rich and hence whenever you spend, you are minding their business. When you pay taxes, you are minding government's business. When you pay mortgage, you are minding your banker's business. You are minding your own business only when you are accumulating assets. Accumulating assets. That is your only business.

I liked the simple way in which the author is explains a very complex concept.

There are two actions that you have to take in this step. Action one is to prepare your personal financial statement. Author has provided a template that you can use to prepare your statement. Next action is to set your financial goals in terms of debt reduction, creating new cash flow streams etc.

Step 2 is to take care of your cash flow. You have to identify your current source of Cash Flow and the sources you want to have 5 years from today. The two parts of your cash flow management plan are one, 'Pay yourself first' and two, reduce your personal debts. 

Many people confuse the difference between 'Risk' and 'Risky'. One aspect of Cash Flow Management is to understand the meaning of risk and take steps to mitigate the same. Most people consider investing as 'Risky' due to lack of knowledge. Author recommends to improve the financial literacy so as to tackle that misconception. 

There are three types of investors. Type A investors seek problems to solve. Type B Investors seek answers and Type C investors are not interested in knowing much about investing. At the outset it is important for one to be clear as to what type of investor they want to be. Author recommends the reader to become Type A investor who solves problems. The action items include getting educated in business and investing. 

The next three steps (of the seven step process) are to have mentors, learn to handle disappointments and to have faith in yourself and god. One of the powerful techniques mentioned in this book is to note down the names of 6 people with whom you spend maximum time in a day. Once you identify those names, then classify them in terms of the quadrant that they operate. That tells you more about the quadrant in which you operate currently. If you want to change quadrants, you will need to change the people with whom you are spending most of your time. 

With big fonts, a large number of diagrams (each of which almost fills a page) and huge amount of personal opinions, separating the chaff of text from the 'Wheat' of concepts in this book is an arduous task. Too many sub headings separating the texts impact the flow of understanding. Most of the topics and ideas in this book are already covered in his previous book 'Rich Dad, Poor Dad'. 

First three steps in the final section are the only decidedly useful topics that I found in this book. As can be seen from the list of Key concepts list at the start of the review, there are hardly any and whatever are there are also not 'Concepts' in the technical sense.

Ever since Mr.Kiyosaki prided himself as a 'Best Selling Author' in his book Rich Dad, Poor Dad, I have got some aversion towards his books. I prefer reading a book the focus of which is to educate the reader and provide conceptual rigour  to reading a book the main talking point of which is that it is a 'Best Selling' tome. Mind you, I respect that it is a 'Best Selling' book and respect the views of the readers that made this book 'Best Seller'.

To be fair to the author, I am  a knowledgeable investor and I may not be the target audience for this book. Even if this book is targeted to the not so knowledgeable investors, the job of a book on Finance is to increase the knowledge level of the readers and inspire them by providing conceptual pegs which they can use. This is what Mr.Lynch has done with his book 'One up on wall street'.

This book fails that test in my opinion. 

If you want to read Kiyosaki, I recommend his first book, 'Rich Dad, Poor Dad'

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