THE 4 PILLARS OF INVESTING Cash Flow: Module 22 4 2 T Tr LLC A eserved. So one of the things that’s frustrating about investing is control. Buy a stock, feel like you have no control

Cash Flow: Module 2THE 4 PILLARS OF INVESTING

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The 4 Pillars of Investing | Cash Flow : Module 2

© Tanner Training LLC. All rights reserved.

So one of the things that’s frustrating about investing is control. Buy a stock, feel like you have no control over it, okay? So, we’re going to be speaking, when we do cash flow a lot about the idea of trying to bring in as much control as possible. Now, in the first two things we’ve studied, Technicals and Fundamentals here, we don’t get to control what that says, we cannot have a choice here. And so your 401(k) guy, that’s kind of what he does, he hopes it’s bullish, he hopes it’s good news, he hopes charts go up, that’s all he can do is hope because he certainly has no control. It’s like going to Vegas, betting on a horse or a dog.

Over here, this is where we can start having some choices because while you can’t choose what this stuff does you can choose how you position your cash flow and risk management so I like the idea of having choice. So, the beautiful good news that we have here for you and I, this is beautiful for you, I hate clichés like life changing but this really can be. You see, there are always huge opportunities for income, not small ones either, but the potential in any market up, down, or sideways is absolutely beyond, it’s almost beyond comprehension how much there is that we can do. The more I learn it, the more I act as a student with you, the more I’m amazed at the opportunity that is out there which right now is good news because you know what, in a bad economy there’s not always opportunities to go out and get a job, there’s not always opportunities to get a job. In fact, there’s not always opportunities to get any job that’s decent. There’s not always opportunities to find a raise, there’s not always opportunities for your boss to give you more for less and yet in a stock market the opportunity exists. So that’s something that is really important to understand in this cash flow segment is if we learn these techniques we will always have something to work on, we will always have somewhere to turn, we will never be without opportunity which a lot of quadrant people meaning people who are employees sometimes they get laid off and they don’t have an opportunity right now. So, this is beautiful.

Upward movement is something most of us are familiar with, you buy a stock and it goes up so that’s pretty easy. Downward movement is something most people are familiar with, but have not

CASH FLOWMODULE 1 2 3 4 5

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The 4 Pillars of Investing

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ever done themselves which is ashamed because that takes away a huge part of this opportunity. If you don’t learn all 3, then there isn’t always opportunity, there’s only opportunity always if you know all 3. My favorite one is this one right here baby, now I’m not supposed to be bias and I’m not supposed to recommend things to you so I won’t. I will say that that’s my favorite because I have freedom of speech, I can say that. But I think a person needs to learn all 3, so let’s start with upward movement, that’s going along. Now, let’s be a stickler, shall we? Nothing like being a stickler right out of the gate.

Let’s do vocabularies. See this word “long” right here? Long does not equal bullish. Now even though we’re associating it with upward movement, I want you to learn this the right way out of the way. What long means, what long equals is that you’re going to buy something and you’re going to own it. That doesn’t necessarily equate always to upward movement. In other words, there are things I can buy that I bought and that I owned that will benefit me in downward movement. I’m just saying, if you’re going to buy stock you want an upward movement.

Quick illustration so you know what I’m talking about and why am I being a sticker is I might say to you, “Honey I’m long the bics.” Well that means I’m actually barrished the market if I’m long the vics. See. Let’s just do one, we’ll do this again in risk management where we’ll just as well get it right here, right now and we’ll do it the right way. Check this out; let’s go to this one, okay? This is the vics, if we look at the market, the market up here, let’s do the market. Let’s bring up V, well let’s bring up the S&P 500 I guess, we can start with that. If we bring up the S&P 500, it’s hard some struggles this month as of lately, especially in early August. Okay. Late August, getting almost close to the end of August a little spinning cup here, a light volume, look like people don’t know what to do know.

But this big landslide here, so I was barrish during this time. So I wasn’t sure that I was long. Check this out, I was long the vics, let’s get rid of this, long the vics, see how this is going up? So I was long the vics in this period right here, see this period right here? That’s where you want to be long. So even though I was barrish, I was long. That’s why the big sticker on what long means, it means you buy something and you own it. Separate now, separate your mind now, the term bullish from long that would be the best thing to you and then you’ll never screw up and you’ll be okay. I like it. So, if you’re going to go long, how do you do it the right way? How do you buy stock the right way? Well, let’s start with basic stuff.

Here’s one thing, one technique you could use to help you. Have you ever had people that you know, you’re talking to them about your stock or whatever and they say, “Hey, I don’t know what to do, I bought some Hewlett Packard and went down and now I don’t know whether to buy it, sell it, or buy more and get rid of it. I’m scared that if I get rid of it, it’s just going to go right back up

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more than when I sell it and I’m scared if I hang onto it, it’s just going to go down further and cost me even more money than I have. I don’t know what to do.” And that’s amateur investing, isn’t it? You don’t know what to do and you’re struggling.

So, here is a way that you will never be in that situation ever again. If you will do these five things that we’re going to talk about. When you buy stock, when you go long for a little capital gain here, you’ll never be in a situation where you don’t know what to do. Does that sound appealing? Sound like something you could commit to? Sounds like something you want to share with your fiduciaries? I think it is, I think it’s wise, so let’s see what you think here. Five things we’re going to do here.

Now, technical analysis, what have we got here? We’ve got an up trend, right, this high here is higher than this high, and this low here is lower than this low. So I draw my trend lines, just like we learned, I see it’s in a range. I also remember from the technical analysis class that this was a point of resistance and then boom, they changed their mind and it became a point of support and that’s not going to happen dozens of times, happens thousands of times. So in my minds eye I say within myself, “Hmm, I think that it’s likely to just do that,” that’s what I think. So I want to exploit that.

So I’m going to do 5 things to try to earn this money and exploit this move. Okay, here’s the 5 things we’re going to do. #1, we’re going to put in our entry here, off support, maybe balance an off support, maybe a little above to get put in, make sure this is established. We’re putting in here around $100 somewhere. Whenever I say the word entry, I want you to speak out loud with me, even if you’re in your home, even if you’re going to wake someone up, even if it’s at night, in the day or whenever it is you are and I want you to say, “Entry criteria.” Entry is associated with criteria. It’s not a gut feeling, it’s not even a feeling that will go up, it’s Mr. Spock, it’s the casino, it’s the rules. For example, I might set a rule that says if I’m going to be long in a stock, going to buy stock, the broad market has to be bullish, that might be a rule.

I might want sector rotation meaning that money is rotating into the sector, it’s showing strength, I want to be one of the sectors, that’s a rule. I want to have fundamental analysis on that cooperation that has earnings, that has a good PE, it’s got good value to it, the peg is stronger, than others in it’s group. I just want strong fundamentals or I’m not trading the stock. I want to have some technicals indicators, I want some type of technical indicator saying this is heading the right way.

I want price patterns that are bullish, for example I want higher swing high and higher swing low so I want to trend within the stock that matches this broad market that’s bullish. Maybe I have a candle pattern, maybe this things coming down here and got a little trough here and got a little candle in

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there and I see a bullish engulfing candle maybe. Some type of candle pattern that is bullish right here and then I want a good reward for the risk I take, good risk reward ratio. Okay that’s a short list, and as you get more classes are more advanced you can add to that and lock it down.

What’s the message at the basic level? What’s the message right now? Criteria, we got to have some type of criteria, not gut feeling. Now contrast that to your 401(k) stuff, I know I’m always bashing them, but I wrote the book 401(k)aos, what else am I supposed to do, that’s what I do. But look at this, you buy a mutual fund, why? QE3 or no QE3, you’re just buying it. Sovereign Fundamental, the heck with Europe, we’re buying it. Stock market, S&P downgrade, we’re buying it. They buy no matter what, buy buy buy buy buy buy, so mutual fund companies can charge fees? I don’t know if that’s why they say do it, but could be. But it’s certainly not criteria, certainly not as good as we can, we can do better, can’t we? We can. So there’s my little vent on that. Okay, I’ll try to get it under control.

Targets got to be likely. Now it’d be silly to set a target on this at 180. Look, look at its trend, it’s going at about this pace, this is about the angle it’s going at, 120, yeah, that seems pretty likely to me, right? I don’t want my goals being hopeful, I want them to be what? Likely, remember that? I want the goals to be likely and so it could go down, it could shoot up, but this probably your likely scenario, unless it changes, which it may, but all things being the same, object in motion stays in motion until something changes it.

So we’ll going to say hey, we’re going to go for this target right here. Now, likely criteria, entry, targets, got to be likely. Why would I trade something that’s not likely? I don’t know why I would, don’t think you would either. Now it’s time for lesson to reprogram our brain and allow ourselves to at least open up the idea to something new. Some people say you’re supposed to buy a stock and hold it until you die. What if you did that with some of your other assets? I want to do what I expect you’re a businessman; this guy is on the job, what control do you have over that? If the guy isn’t doing what you want to do, what control do you have? The only control you really have is what? Terminate him, send him home, disciplinary action, right, something naïve. But you can’t just sit around and say, “Well gee, I hope this changes, maybe if I just wait long enough he’ll start to work hard.” No, that’s no control. What measures do you have to impact this guy? Terminate him, fire him. You owe it to your shareholders and to your family, and to him.

Real estate guy gets the final notice on his rent is past due and doesn’t pay it, what control do you have? The only control you have is to say, “Look, we’re going to have to evict you, you’ve left me no choice. I’ve got a mortgage to pay on this thing, you’re not paying the rent, I can’t do it out of my pocket, I can’t let you live for free, doesn’t work that way. So you understand that when things

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don’t go your way you have to look at what controls you have. What controls do you have? You can’t make the guy work harder and so if you can’t make him smarter or make him work hard, you’re going to have to let him go. You can’t make the guy pay his rent other than what? Okay, make me pay, all right, the only control I have to make you pay is what? I got to evict you. Well gosh darnnit, if a stock goes down, what control do you have if your stock doesn’t perform the way you want it? The only one I know of is hedge, your sell, that’s it, that’s the only two I know. Either sell the thing or you hedge, one or the other. Either insurance or sell.

So you got to think, what control do you have? If you want a cash flow, you want a capital gain, you want this to go, you’ve got to act on it, got to act on it. So, an exit, when do you put that in? Before. So, write this down somewhere if you’re writing stuff down. If you’re just listening for the first time I know you’ll listen again and write it down the next time. Trading journal, in a trading journal we write these 5 things down and here’s the keyword, “before”. This is how you avoid the buy in Hewlett-Packard that doesn’t know how to sell because you’ve got this whole thing planned now, don’t you? You got the whole trade planned before you get in and no matter which direction it goes now you’ve got a plan of what you’re going to be before, you’ll never be in a situation where you don’t know what to do, sounds pretty smart to be, pretty touch to lose half of your money in this stock if you’re doing it this way. You got to have your reward down.

That’s just the distance between the entry and the target that’s likely and so here you are looking to make 20 bucks, you know what, if you’re going to go to the office and someone’s going to hire you, one of the things you’re probably got to know is how much money you’re likely to make. Can you imagine at a job interview:

Person 1: “Come work for us!” Person 2: “Oh really? How much am I going to make?” Person 1: “I don’t know, something.” Person 2: “Well, do you have any idea?” Person 1: “Not really.”

Don’t you think we should have an idea of what we’re going to make? How much are you going to make on your 401(k) next year? What’s your target? What’s likely? How much are you going to make on your 401(k)? How much are you going to make in your IRA next year? $30,000? $100,000? $1? What you’re going to make? We want to have an idea of what reward is likely and what that number is so we have something to shoot for, so we’re not just ambiguously nuts, got to know our risks. A lot of people just buy that at 100, loosen technology goes from $70 to $0, look at WorldCom, Enron goes from $90 to $0.

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I got to have a line in the Sandman, I got to decide and I don’t know whether I’m going to risk $100 to make $20, I’d risk 10 bucks to make $20 though, that’s the distance between. So there’s 5 things, put those in, try them out, experiment on paper and talk to your fiduciary, does that make sense, let him poke holes in it, maybe you want a different fiduciary, I don’t know. Let’s see what happens here though, okay?

So you got your target and your entry. Now look, this is called a risk reward ratio. Notice something here; let’s get the pen out. Notice here I had a $1 risk and the $2 reward, didn’t I? For every $1 risk I was willing to take it’s nice to have 2 or more I think. So you make 10 trades. Whoops. So you make 10 trades, what am I doing here? So you make 10 trades, push the wrong button sometimes. And 5 of them you’re right and 5 of them you’re wrong. Well in the 5 of them you’re right you’ve made $20, that would be $100 you’ve made. On the 5 of them you were wrong you lost $10, that would be $50, but you made $100, lost $50, I like that math. And that’s when you’re 50/50 on your trades.

You’re going to find out, in fact I’ll bet you’ll notice as you get past awareness in the competency and once you’re into proficiency it’s not that you’re some genius stock picker. Look, you’re using criteria, you’re using the fundamentals, you’re using the technicals but it’s this idea of exit, right, it’s this idea of exit that you’re going to be using that’s going to help you trade.

So, when we want to make money in the upward market and the fundamentals and the technicals say yes, it’s upward, it’s more likely to go up than down we have really good… and that doesn’t make sense too, doesn’t it? If we got a upward market in the beginning, the sectors strong, we got this good PE, we got this good peg, we’re getting a good value, it should go up, it should naturally continue on its trend, we can feel confident with that. Somewhere to nominally, great, great. We trade 10 times, do this 5, do this 5, that’s cool, we can live with that, we’re making money right? We’re doing alright. So that is risk to reward ratio.

So we move on to going short, 5 things we got to have: target, entry, exit, risk, reward. I know you’ve got these memorized right? We’ll cover them all up, okay? I know you can get them without peeking. We always need to have what when we enter stock, we got to have what? Criteria, don’t we? And if we’re going to set a target, it can’t be clear up here, it’s got to be something that’s what? Something that’s right in the old range there, something that’s likely. Hey, if it goes where we don’t want it to go we got to exit, when we planned that out before.

So, likely criteria before, we enter based on criteria, not on motion. Is it up to snuff, does it fit all the stuff? Does it fit your fundamental and technical stuff? I tell you what, you get into the next classes in competency, we start getting real detailed on that baby when we have time. Likely

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target, got to put this in before. How about a trading journal, how about you list these 5 these in the trading journal, list your criteria, list your exit, why do you think it’s likely draw in some charts. They are fun to draw so you just connect the dots like that, there’s your trend. So you might see in your trading journal, okay and I’ll tell you what about this stock, I bought this stock simply because resistance was turning in support. I had higher highs and lower lows, I was in a up trend, I had a PE that was really really low and I had a peg that was even lower and it was beating the others in the broad mark was up and there was sector rotation going in. That’s a lot better than saying, “Andy, I bought this mutual fund because I was told to.” I like that better.

So, risk reward ratio, give you a little numbers in your advantage, we’ll talk more about that in risk management, but now that we know how to do a little bit better when we’re going up, let’s talk about how we make money when it’s going down. That might be a little bit bigger discussion because some people have never done it. Let’s talk about it, what if things start going down like maybe a US dollar collapse, stuff like that.

In fact, in technical analysis we saw this right here and just a little review right here, that looks like a shoulder to me and this looks like a big head and that looks like a shoulder. You know what that looks like? That looks like a white pen that doesn’t show up very well. That looks like a green pen that shows a really nice shoulder in a really nice head and shoulders.

If I draw a line straight across the bottom of that baby the support becomes what? Resistance. That’s called a kiss goodbye and this right here is called a double top and I draw a line that they am and sure enough that hits that, bounces down way down here, look at this how this support became resistance right here and that’s what you call a descending triangle. Not when I don’t draw it well you don’t call it that, let’s try that again. That is what I call a descending triangle.

So, interesting stuff man. That’s going to come and we’ll see if it just breaks down further, we’ll see what happens. But, that’s how that works. Now, so what if we do our technical analysis, our sovereign fundamental, say this things tank, how do we exploit this? Now, I was a big stickler on long means we own it, short means that we’re going to borrow something, we’re going to sell and you’re going to have an advantage here because most people’s brain melt down, yours isn’t melting down and mines isn’t melting down. I’m not the smartest guy in the world and I’m sure you’re smarter than me, but you’re going to catch this. The problem is because it’s abstract, people’s brains don’t want to accept it and it’s not that abstract after you get done with this example.

So, this is not Grand Theft Auto where you’re selling stuff that doesn’t belong to you in a bad way, you’re going to borrow some stuff and sell it and this is actually really cool. Think about this, have you ever borrowed a cup of sugar and returned. Have you ever borrowed someone’s

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car and returned it? Have you ever borrowed anything, someone’s pen, “Hey, can I borrow your pen,” and returned it?

And so all you’re going to do is something you’ve done thousands of times, if you’re going to borrow something from someone and then you’re going to return it and that’s it and you’re not going to break any rules. You’ve borrowed movies from your names, I know you’ve borrowed that Barry Manilow from your buddy; did you give it back to him? I know you’ve got it, you love the Barry, he writes the songs. He writes the songs and makes the young girls cry, isn’t’ that sad that I know that? That’s frightening. I know you got that Neil Sedaka album you borrowed, okay, so we’re going to borrow some stuff. Here we go. We’re going to borrow some things.

Downward movement, we’re going to exploit this. Hey, on a serious note, the only time there’s always an opportunity is if you know all 3. Now this is exciting because if you make a commitment to learn this and understand it, you have a whole new world now opening up to you, whole new opportunity. Why am I selling this so hard? I’ll tell you why I’m selling you on this concept now, look at this sovereign fundamentals. Everything that happens is in the shadow of the sovereign fundamentals we talked about. Greece is in trouble; Europe is in trouble, United States downgrade, there is reason to justify getting good at shorting, even past awareness now, right? So, relax, if you don’t get it the first time, what do you do? You review it.

Just like that car you’re driving with the clutch, the stick shift, you stalled it a few times but once you kept trying you got it down. Now, I taught this to thousands of people and I used to teach it with stock, it never worked very well so I teach it with something else. You borrowed a cup of sugar; you’ve borrowed someone’s phone to make a call, ever done that? Say, “Hey, can I borrow your phone to make a quick call,” text somebody, whatever. My phones dead. My phones always dead, my battery’s dead. So let’s do it with the phone.

Now the first thing I’m going to ask about this phone is this, you’re going to say what’s likely. Technology, here you got the Iphone 4 let’s say and the Iphone 5 is coming out. When the Iphone 5 comes out, you think that’s going to go up in value or you think it’d go down? I mean, sure, maybe it could go up but what’s more likely? I would say that if I were a betting man, and since I’m a stock trader I am, I’m a betting man, I’m going to say I think it’s going to go down. I think that when the Iphone 5 comes out, that the Iphone 4 is not going to be worth as worth. It’s called off calescence risk is what it’s called. And so we think this thing is headed downward okay?

So what do you do? You go to your boss, you say, “Hey man, my battery’s dead, can I borrow your phone,” or “Hey, I need to go to Europe, you have the ATT on roaming on this business trip, I’m taking your phone,” whatever it is, you borrow it. Now this isn’t devious or mean, you’re just

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borrowing his phone and when you give it back to him it’s going to be in the same condition that it is today, everything is on the up and up here, you’re just borrowing his phone. So, you say, “Hey boss, can I borrow your phone?” “Yes, you can borrow my phone, go make your calls.”

And you think this is going to go down. Now here’s the thing, the New York Stock Exchange, NASDAQ, just an auction like we talked about in technical analysis. Remember that market maker; he’s looking at buyers and sellers? Do you know that’s all Ebay is? All Ebay is is a place you can go and sell stuff, find out what the supply and demand is. You want to find out something’s worth, what something is worth? Look it up on Ebay and you find that phone is worth $500 on Ebay, you think it’s going down in value. So you sell it. Now that does sound weird, you wouldn’t do that in real life, you wouldn’t sell your bosses phone, but you’re going to find we’re allowed to do that with stock, it’s 100% legal, ethical, moral right through good and everything else. But just get the concept.

So, you’re going to borrow your bosses phone and we’re going to sell this on Ebay for $500. Now what do you owe your boss? You don’t owe him any money, you owe him his phone back. So you’re going to have to give him back a phone here in a little bit and we’re going to see if that’s likely. We said that we thought this was going down, right? We think that this is going to go right down here in value. And so we’re going to wait for that to happen. And sure enough we let that price drop just as we had prognosticated, now the Iphone 5 comes out and that phone is only worth $300 but you have $500 because you sold it when it was up here, very cool. I’ll bet you already know what you’re going to do. See, 3 steps and you already got it. You borrow it, you sell it, you let the price drop. I bet you got the rest of it, what do you owe your boss. You’re on the phone, what are you going to have to do? Buy it back. But you only had to buy it back for the new price, $300. Now give him back his phone and show him you’re a good guy, but what you got, you got $200 left over.

Let’s review that, holy cow. We thought the phone was going to go down in value, obsolescence risk, right? The Iphone 5 comes out, bam, it’s going to go down. So we borrow somebody’s phone, we sell it on Ebay at the high price, sure enough we let the price drop, buy it back and we keep the difference, we give them back the phone.

So, that’s how shorting works, you simply borrow something and sell it off when it’s expensive and then you buy it back when it’s cheap and return he item. Now that seems kind of weird because the phone lost value and all that and you wouldn’t do that with your boss but understand the concept now, you know that’s how stock works. So in a stock we ask the same question, what’s likely with this stock, right? Maybe it’s the UUP, right? Maybe it’s that exchange rate fund we think is going to tank or whatever it is. Maybe it’s Fannie and Freddie; maybe it’s Blockbuster Video.

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How do we know whether it’s likely? Fundamental analysis, technical analysis, we see they have no cash flow, we see they’re debt climbing up there, we see oblescence risk; we see market share being taken away from Blockbuster by Netflix. We say this stocks had it’s run, it’s headed down, going on down baby, down down down. We think that sucker is going down. Why do we always choose the green pen? Red is a better pen for going down.

So what do we do? We say, “Hey, Mister Broker, can I borrow some stock? Can you do that?” “Yes you can.” “Is there interest on it?” “Yea, but it’s negligible at this point for this discussion, it’s like tiny, tiny, tiny.”

It’s not like your credit card loan is tiny, it’s what we call negligible in many instances because we’re not holding it for very long. And so we say, “Can I borrow this stock?” Hey, if you put money in the bank, they’re going to loan that money out. The bank will loan money out, they have fractional reserve lending, they’re good with it. The Fed let’s them do it. Well, look at this, we can borrow stock too. You can borrow money, you can borrow stock, you can borrow a cup of sugar. You can borrow it’s favorite tie, whatever you want to borrow your broker will loan it to you so you’re going to borrow some stock.

What do you owe them? 1 share. Why did you borrow it? Because you think it’s going down in value and so you sell it on the New York Stock Exchange. In fact, you know what’s crazy? The broker will even do both of those steps for you. He’ll not only loan you stock, he’ll actually go find a buyer for you and sell it, go to the market maker because he stands ready to provide the quitter, do you remember?

So, you borrow the stock, you sell the stock for $500, what do you do next? You let the stock drop to $300, you buy it back for $300 and the brokerage takes their stock back when you say. Is that awesome? No time limit either; you just got to make sure you got your margin requirement.

What’s the danger of this? That sounds too slick. The danger is what if the thing goes up. Let’s draw this graph up here and what if the stock goes up to $600, well if the broker wants the stock back, if you sold it at $500 right here and he wants the stock back, you’re going to have to buy it at $600 which would be what? Buying high end, selling low. If you buy something at $600 and you sell it at $500 you’ve just lost $100. And the reason a lot of people don’t short is how high can this go? Well it can go further than this screen because you know what’s North of that? This crazy number infinity. Is the stock going to hit infinity? No, there’s no such thing as stocks that hit infinity, but in theory, that’s your risk.

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And so what do we want to do? What do we want to do when we do this? I’ll tell you what I would do. I would set an entry here at $500, I would set a target here, $300 and I would set an exit here at maybe $550. And that way, if the stock goes down we make our money. If the stock goes up, we exit, we only lose a little. See it works both ways. So very, very cool stuff. We still have an entry, target, exit and risk reward here.

So review one more time, we borrow the stock because we think it’s going where? Down. We sell it on the New York Stock Exchange, right? Sell it on the New York Stock Exchange, we let the price drop, we buy it back, we keep the profit, get back the stock. We’re all square, we can do it again. That’s the short in concept. If you didn’t get it, back it up and do both examples again.

We think it’s going down, we borrow it, we sell it, we let the price drop, we buy it back and get the item back. Same thing, we think it’s going down, we borrow the stock, we sell it, we let the price drop, we buy it back and keep the money. How simple is that? You do it enough times, you’ll get it. One more? No, I don’t think you need it.

So, this is what’s really fries peoples brain when they realize this. Watch this, this is going long on the stock. Right? And this is going in the stock. If you’ll notice, these are identical, sold at $40, bought at $20, profit at $20. Sold at $40, bought at $20, profit at $20. See that? The only difference is the order in which we do this. Here we bought first and we sold second. See that there? And here, what do we do? We sell first and we buy it second. And how are we able to sell something that we don’t own? We borrow it, we borrow it and sell it, buy it back and return it.

Isn’t that cool? I think that’s cool. What’s not cool is when I don’t run this right. Why do you think I do that? You’ll notice, there’s a consistency whenever I do this little foopar right here it’s because I’m trying to do a race ink off the screen. The buttons right next to each other and I have hands that are big, my fingers are like sausages, they’re massive like big basketball hands.

So watch this – When I buy a stock, let’s get the colors right, when I buy a stock there’s my entry, right? Might be my target is like right up here, but what would I have to have? Just to make sure we’re safe here I’m going to put an exit and that way if the stock goes the wrong direction I don’t lose as much. Okay if I’m going to go short I’m going to do the same thing. I’m going to enter here, but now my target is for it to go down so I’m going to put my target down here and I’m going to put an exit up here, that way if it goes up I don’t lose a lot.

So again, the only difference is here I’m buying first and selling second, and here I’m selling first and buying second, that’s it. In fact, a good story to tell right now is the key in the engine. Do you

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need to know how the fuel injector works to make this happen? Nope. Do you need to know how the key works to make this happen? Yep. To drive a car you need the key, not the engine.

So, when you short stock, or when you go to buy yourself stock what you’re going to see is this, let’s draw some white buttons. Over here you’ll see a button that says Buy and a button that says Sell. So we put a B in this, you see a Buy button and a Sell button. If you think you want to go long, you buy it first. Remember, buy long means we buy it and we own it. Short means we borrow it and we sell it. If you want to do this one they’ll be a button that says Short or Sell Short. They’ll be a button that says either Buy or usually it says Buy To Cover, BTC, Buy To Cover.

You’re covering something you borrowed, right? You got to buy it back so you can cover what you borrowed. Very cool stuff. I want to reiterate, I know I go over but a lot of people are new when I tech it and I don’t know if you are so, right here notice this and this is the same thing. We’re buying low and selling high. We’re buying low and selling high, it’s here we bought here and sold second and here we sold first and bought second. Did I deliver that enough? I hope I did but I hope you know I’m just trying to be sensitive to people that are new to the program.

Same points to identify as I illustrated, right in the entry? I’m going to say here’s my entry here, bonk and here’s my target here, bam and here’s my exit here when I go long. That way, if the stock goes against me I can’t lost very much. Down here the most I can lose is 0 and the highest it can go is what? Infinity.

Over here the highest it can go is infinity and the lowest it can go is 0. So if I buy a stock and there’s no exit in here, I can lose what? I can lose 100% of the money I put in because I buy right here, stock goes down to 0, go bankrupt, lose 100% of your money. You buy right here, they cure the cancer, it goes through the roof. So here you have a risk of infinity and here you have a risk of 100. Well, before I get this too ugly, if you lose 100% of your money in a stock, that’s dumb because we could have put in a what? An exit. If it hits here the most I’m going to lose is $10 and you lose an infinite amount of money, which doesn’t hurt anymore than this, if you lose all you money losing an infinite amount is the same feeling, thank you.

This scares everybody, oooo, infinite, oooo, infinite risk. Ah, stocks actually don’t ever hit infinity, but this could double and if it doubles that’s not good. It could triple; it could quadruple, that’s realistic. So what do we want to do? We don’t want to lose 100% of our money so we put in an exit and we don’t want to lose an infinite amount of money so we put in an exit. I think you got it. So that’s going long and that’s going short and that’s the five points we put in when we’re going to go stock.

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This is a good basic class; it’s a good basic to get started with. In your advanced class, we’re going to learn even more. Think of how good you’re going to be though. Pretty soon you’ll be saying Oh yea, and there’s a [inaudible] right here and oh yea, it just broke above a moving average and oh look, the [inaudible] just crossed and all kinds of cool stuff you’re going to see. You just get better and better and better.

So you will get better and better. Another thing we can do is we can talk about when we hit targets. So let’s say this stock does go up and bingo, it hits the targets. Some people say, “Oh, I’m going to sell it when I hit this..” No, no, no, no, no, what if it does go further? Why would I take away my upside? If I hit this target of 120, yeah, I made $20, but hey we might make $10 more, what if we make $40? Why take away upside?

Just as this thing can break down, it can also break out. Just as it could possibly break down, it’s not likely to break down, it’s not likely to break out, but either of them could happen. So if it hits here and this breaks out, so what people will often do is they will adjust the exit. In other words, over here when it broke out we just move our exit up here. That way if it keeps going, we’re in for it. And if it pulls back, bam, not we’re out.

So we kind of let the stock put us in and take us out. Let me give you another hint right here, sometimes what I’ll do is I’ll put my entry here. I said we can use the computer and then we don’t have to baby-sit this. Maybe I’ll put my entry here and I’ll tell the computer, look, if it hits 102, that means it has to be headed what? The right direction to get in. So this gets established. What do you think the chances are of me hitting the target are once it [inaudible]? It gets better or worse?

You think about this, right now it’s headed down, isn’t it? Right now it’s headed down so what I’m going to do is I’m going to say hey, put my entry in just above, that way it’s got to be headed where? Up. If it hits it, we’re making money during the day. If it goes down, we were never in the trade. If it goes sideways, we were never in the trade. Kind of a cool trick.

Well we’re going to do the same thing over here. We’re going to say look, this thing shot up to 125, I’ll put my exit at 120 and maybe it shoots up to 130, I’ll put my exit here. Then maybe it shoots up here and I’ll put my exit here. Then maybe it shoots here and I put my exit here and there’s a double pop and boom, right there is where I get stopped out.

Very cool stuff. So that’s adjusting the exit and great things to learn. I’m going to put you in an advanced course after this one that’s going to get way detailed on this. Right now we’re just getting some basic concepts down, I hope you like them. Ask yourself this question, if you simply do

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these entry, target, exit, here’s my risk, and here’s my reward. You do those 5, what a difference that would make right there. I think that would make a pretty big difference.

Why don’t brokers just do this? Well, as I said before, that’s always a good question, why don’t they? Well imagine trying to do what we just did for 1,000 different clients 1,000 different ages, at 1,000 different incomes at 1,000 different dollars of risk, 1,000 different goals and each one of them has 10 stocks, that’s 10,000 stocks to have to put in what? An entry, a target, an exit, a risk, and a reward on. That would be tough, wouldn’t it? I don’t even know what that means. I’ll bet you know what it means.

So, yeah, brokers are great guys, don’t get them wrong. No one cares more about your money than you, right? No one cares more about it than you. Now we have to figure out how we do this faster and better. So there’s long and short, but is there more? Oh yes. Oh yes, there’s much more.

END OF CASH FLOW – MODULE 2

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THE 4 PILLARS OF INVESTING Cash Flow: Module 22 4 2 T Tr LLC A eserved. So one of the things that’s frustrating about investing is control. Buy a stock, feel like you have no control