Cash flow vs Net Worth

Recently I read the book “2nd Chance” by Robert Kiyosaki. It is always a joy reading his book, cause it is simply written (he is after all the author of the International Bestseller Rich Dad Poor Dad).

Especially, when you contrast that with “The Intelligent Investor” by Benjamin Graham.

Robert Kiyosaki on Second Chance: For Your Money and Your Life (click here)

The word “cash-flow” is repeated numerous time in his book. In fact, he made the distinction between:

1. Being an employee, with a MBA climbing a corporate ladder, working for pay checks, bonuses, and a retirement portfolio filled with paper assets vs Being an entrepreneur, building a business and investing in the real estate, working to create assets that produce cash flow.
2. “Net Worth Millionaire” / Millionaire next door- high paying job, money in the bank & stock market, nice homes vs “Cash flow Millionaire” – people who have assets that generate cash flow eg. businesses / investment properties / own resouces like oil, gold, silver, land etc.
3. One type of rich is rich people with high paying jobs, such as corporate executives, professional people such as doctors and lawyers, athletes, and movie stars. High-Income rich. The other type of rich is the person who does not need a job to be rich. Most of these people are asset rich.
4. Tertiary Wealth (paper wealth such as high paying job, money in the bank & stock market, nice homes) vs Secondary Wealth (Production wealth such as entrepreneurs who are farmers who produce food, fishermen who catch fish, oil drillers who produce oil, miners who produce gold, factory owners who produce products) vs Primary wealth (Land and oil).

‘Rich Dad’ author says the 2016 market collapse he foresaw in 2002 is coming (read here)

In any market crashes and in any possible Great Depression, Net Worth Millionaires and Paper investors who own ‘claims’ to wealth (tertiary wealth) but not wealth itself are most at risk. In fact cities such as New York will be hit the hardest. I reckon this is the same for Singapore as well (the city state doesn’t have much primary and secondary wealth).

As we know, Robert believes in property investments. In fact, in the book he mentioned that his Wife (Kim) and him play Monopoly in real life. They have thousands of little green houses, also known as apartments, two hotels, five golf courses, commercial buildings, several businesses and many oil wells.

In many ways, I do agree that cash flow is very important. The irony is that I did not set out to invest for cash flow.

In fact, I have very few high dividend yield stocks. When it comes to stocks, my primary focus for stocks is not on dividend yield nor capital gain. My focus is on potential capital loss. Eg. In the worse case what are the companies that can still survive and generate earnings and growth. (The Loser’s Game by Howard Marks)

Net Worth… what is it worth? (read here)

Focus less on Net Worth. Think more in terms of Cash Flow (read here)

I have been playing the Cash Flow game online recently (this was created by Robert Kiyosaki). And from the game I can sense the principles which Robert is trying to instill. In the games, you get deals along the way. For instance, you get to buy or sell stocks (at low to high prices), purchase preferred shares which give you rather low yield, buy properties that comes with cash flow (negative or positive), purchase of rare gold coins, chance to give to charity…

From the game, stocks typically do not offer you yield (you either buy or sell them – at different prices). So it is more for lump sum gains or losses. While properties tend to give you much better yield – but you typically need to get loans to purchase them first. Robert advocates getting into “good debt” to purchase assets like properties. Robert doesn’t believe in holding stocks for the long term (esp. when the major market crash will be happening soon in 2016).

The ultimate aim in the cash flow game is to achieve sufficient cash flow which is more than your expenses to get out of the ‘rat race’ and move to the ‘fast lane’ and live your dreams. Be with the “big boys” and have much higher cash flows.

You don’t win the game and get out of the ‘rat race’ by having large amount of cash. Even after getting huge capital gains from the sale of stocks, gold, land, properties, etc.. the objective is still to acquire assets that give you cash flow.

Coming back to Singapore, while I agree properties can generate cash flow, I am not sure if the yield is as attractive here (as compared to say America).

In fact, in this article, it mentioned:

Singapore’s house price-to-income ratio (Property Price / Annual Income) is 25.38. That means most of Singaporeans have to work more than 25 years to pay off their mortgage loans. In another word, if you “invest” in a property and stay in it. It is an “expense” for the rest of your life.

It is probably hard to grasp this concept because such phenomenon is a norm in Singapore. But if you have a chance to compare this globally, it may surprise you:

• U.S.’ average house price-to-income ratio is 2.16
• Germany’s ratio is 4.78
• U.K.’s ratio is 6.73
• Japan’s ratio is 6.99

And that you shouldn’t own a Singapore condominium for rental yields. According to Global Property Guide, despite the recent drop in property price, the rental yield remains poor at 2.35% to 3.00%. The central area Condo rental yield is as pathetic as 1 to 2 percent.

 

So the other option is invest in overseas properties. But well, you need know the place, regulations, tax laws etc well…. to invest in properties overseas.

And I have heard and read about ‘horror’ stories from colleagues or locals who have invested in overseas properties. Eg. Cases of people breaking in, tenants who just stay there without paying rent (squatters) -even after you chase them away and lock the gate, they can still break the chains and locks and continue to stay there for free… without you being there physically it is hard to take care of your property and manage the tenants. Of course one option is to ask or pay the security guard or neighbours for help..but it is still a secondary measure.

Or you can invest in REITS.

However, to Robert, he views REITS similarly to shares (paper assets). For him, properties near places where there is always work / schools (hence there will always be ready tenants) at good prices and steady cash flows are good assets. He is not worried when market crashes etc, cause the cash flow from these properties will likely be there. Actual properties allow him to use leverage (good debt) and do alterations to the property.

 

I wonder if anyone would write a best seller like Robert’s book, in the Singapore context. A book that focus on being a “Cash Flow” Millionaire.

What would be in the asset column? High dividend yield stocks / REITS / Business Trust, Singapore / Retail Bonds, CPF, P2P loans…. (5 properties….hmm…)

Well, after all, we have quite a few Singapore bloggers with high dividend income.

Five Bloggers Collecting > S$10,000 Of Dividends Yearly (read here)

 

I don’t consider myself as rich, but if I am, I reckon I will fall straight into the high-income rich (with paper assets). If you see the image below, my assets probably belong to what is shown on the right page.

In fact reading most of the financial blogs in Singapore, I feel that most bloggers are paper assets rich (they invest in stocks, bonds, savings) – “Net Worth Millionaire”? Then again, there will always be property asset rich people in Singapore (who don’t blog).

At one period last year, there were some articles written by some of our local financial bloggers here about their individual net worth.

“My Net Worth Is Only 5-Figure And I’m OK With It” by Turtle Investor (read here)

“I’ve Zero networth!” by BULLy the BEAR (read here)

 

Perhaps if I live in Australia or America, I might have been a different kind of investor. I reckon in these countries where the yield is much better for properties, where the overall price for properties is generally lower (in relation to income level there) and where there are no such things as Total Debt Servicing Ratio (TDSR) and Additional Buyer’s Stamp Duty (ABSD)… things would be different.

Well, nothing is impossible. As difficult as it might be – it is still possible to invest in overseas properties. I can be an entrepreneur, or start a business on the side while having a full time job.

And yes invest in ‘primary wealth’ such as silver or gold.

Financial freedom out of reach? Shall leave you with this song.