Pagina principale Rich Dad's Guide to Investing: What the Rich Invest in That the Poor and Middle Class Do Not!
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www.read.forumsplace.com This publication is designed to provide competent and reliable information regarding the subject matter covered. However, it is sold with the understanding that the author and publisher are not engaged in rendering legal, financial, or other professional advice. Laws and practices often vary from state to state and if legal or other expert assistance is required, the services of a professional should be sought. The author and publisher specifically disclaim any liability that is incurred from the use or application of the contents of this book. Although based on a true story, certain events in the book have been fictionalized for educational content and impact. RICH DAD’S GUIDE TO INVESTING. Copyright © 2000 by Robert T. Kiyosaki and Sharon L. Lechter. All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review. Published in association with CASHFLOW Technologies, Inc. “CASHFLOW” is the trademark of CASHFLOW Technologies, Inc. For information address Warner Books, 1271 Avenue of the Americas, New York, NY 10020. A Time Warner Company ISBN 0-7595-8139-8 A trade paperback edition of this book was published in 2000 by Warner Books. First eBook edition: February 2001 Visit our Web site at www.iPublish.com ACKNOWLEDGMENTS On April 8, 1997, Rich Dad Poor Dad was formally launched. We printed a thousand copies, thinking that quantity would last us for at least a year. Over a million copies later, and not a dollar spent on formal advertising, the success of Rich Dad Poor Dad and the CASHFLOW Quadrant continues to amaze us. Sales have been driven primarily by word of mouth, the best kind of marketing. Rich Dad’s Guide to Investing is a thank you to you for helping make Rich Dad Poor Dad and the CASHFLOW Quadrant so successful. We have made many new friends through this suc; cess and some of them have contributed to the development of this book. The following are friends, new and old, whom we would like to personally thank for their contribution to this book. If you are not on this list, and you have helped in any way, please pardon our oversight and know that we also thank you. For both technical and moral support we thank: Diane Kennedy, CPA; Rolf Parta, CPA; Dr. Ann Nevin, Educational Psychologist; Kim Butler, CFP, Frank Crerie, Investment Banker; Rudy Miller, Venture Capitalist; Michael Lechter, Intellectual Property Attorney; Chris Johnson, Securities Attorney; Dr. Van Tharp, Investor Psychologist; Craig Coppola, Commercial Real Estate; Dr. Dolf DeRoos, Investment Real Estate; Bill and Cindy Shopoff, Investment Real Estate; Keith Cunningham, Corporate Restructuring; Wayne and Lynn Morgan, Real Estate Education; Hayden Holland, Trusts; Larry Clark, Real Estate Entrepreneur; Marty Weber, Social Entrepreneur; Tom Weisenborn, Stockbroker; Mike Wolf, Entrepreneur; John Burley, Real Estate Investor; Dr. Paul Johnson, Professor of Business at Thunderbird University; The American School of International Management; Carolita Oliveros, Professor-University of Arizona and Thunderbird; Larry Gutsch, Investor Advisor; Liz Berkenkamp, Investment Advisor; John Milton Fogg, Publishing; Dexter Yager and the Internet Services family; John Addison, Trish Adams, Mortgage Banker; Bruce Whiting, CPA, Australia; Michael Talarico, Real Estate Investor, Australia; Harry Rosenberg CPA, Australia; Dr. Ed Koken, Financial Advisor, Australia; John Hallas, Business Owner, Australia, Dan Osborn, Foreign Exchange Advisor, Australia, Nigel Brunel, Securities Trader, Australia, David Reid, Securities Attorney, Canada, Thomas Allen, Securities Attorney, Canada; Kelvin Dushnisky, General Counsel, Canada; Alan Jacques Business, Canada; Raymond Aaron Business, Canada; Dan Sullivan, Business Canada, Brian Cameron, Securities, Canada; Jannie Tay, Business Investments-Singapore, Patrick Lim, Real Estate InvestmentsSingapore, Dennis Wee, Real Estate Investments, Singapore; Richard and Veronica Tan, Business, Singapore; Bellum and Doreen Tan, Business, Singapore; C.K. Teo, Business, Singapore; Nazim Kahn, Attorney, Singapore, K.C. See, Business, Malaysia; Siew Ka Wei, Business, Malaysia; Kevin Stock, Sara Woolard, Joe Sposi, Ron Barry, Loral Langemeier, Mary Painter and Kim Arries. With great appreciation and in loving memory we acknowledge Cynthia Oti. Cynthia was a Financial Commentator for radio station KSFO-San Francisco, California, a stockbroker, a fellow teacher, and most importantly, a friend. She is truly missed. Our list would not be complete without thanking the incredible team members we have at CASHFLOW Technologies. Thank you, Robert and Kim Kiyosaki Sharon Lechter A Father’s Advice on Investing Years ago, I asked my rich dad, “What advice would you give to the average investor?” His reply was, “Don’t be average.” The 90/10 Rule of Money Most of us have heard of the 80/20 rule. In other words, 80% of our success comes from 20% of our efforts. Originated by the Italian economist Vilfredo Pareto in 1897 it is also known as the Principle of Least Effort. Rich dad agreed with the 80/20 rule for overall success in all areas but money. When it came to money, he believed in the 90/10 rule. Rich dad noticed that 10% of the people had 90% of the money. He pointed out that in the world of movies, 10% of the actors made 90% of the money. He also noticed that 10% of the athletes made 90% of the money as did 10% of the musicians. The same 90/10 rule applies to the world of investing, which is why his advice to investors was “Don’t be average.” An article in The Wall Street Journal recently validated his opinion. It stated that 90% of all corporate shares of stock in America are owned by just 10% of the people. This book explains how some of the investors in the 10% have gained 90% of the wealth and how you might be able to do the same. Rich Dad’s Guide to Investing INTRODUCTION PHASE ONE Are You Mentally Prepared to Be an Investor? CHAPTER 1 What Should I Invest In? CHAPTER 2 Pouring a Foundation of Wealth CHAPTER 3 Investor Lesson #1 The Choice CHAPTER 4 Investor Lesson #2 What Kind of World Do You See? CHAPTER 5 Investor Lesson #3 Why Investing Is Confusing CHAPTER 6 Investor Lesson #4 Investing Is a Plan, Not a Product or Procedure CHAPTER 7 Investor Lesson #5 Are You Planning to Be Rich or Are You Planning to Be Poor? CHAPTER 8 Investor Lesson #6 Getting Rich Is Automatic…If You Have a Good Plan and Stick to It CHAPTER 9 Investor Lesson #7 How Can You Find the Plan That Is Right for You? CHAPTER 10 Investor Lesson #8 Decide Now What You Want to Be When You Grow Up CHAPTER 11 Investor Lesson #9 Each Plan Has a Price CHAPTER 12 Investor Lesson #10 Why Investing Isn’t Risky CHAPTER 13 Investor Lesson #11 On Which Side of the Table Do You Want To Sit? CHAPTER 14 Investor Lesson #12 The Basic Rules of Investing CHAPTER 15 Investor Lesson #13 Reduce Risk Through Financial Literacy CHAPTER 16 Investor Lesson #14 Financial Literacy Made Simple CHAPTER 17 Investor Lesson #15 The Magic of Mistakes CHAPTER 18 Investor Lesson #16 What Is the Price of Becoming Rich? CHAPTER 19 The 90/10 Riddle PHASE TWO What Type of Investor Do You Want to Become? CHAPTER 20 Solving the 90/10 Riddle CHAPTER 21 Rich Dad’s Categories of Investors CHAPTER 22 The Accredited Investor CHAPTER 23 The Qualified Investor CHAPTER 24 The Sophisticated Investor CHAPTER 25 The Inside Investor CHAPTER 26 The Ultimate Investor CHAPTER 27 How to Get Rich Quick CHAPTER 28 Keep Your Day Job and Still Become Rich CHAPTER 29 The Entrepreneurial Spirit PHASE THREE How Do You Build a Strong Business? CHAPTER 30 Why Build a Business? CHAPTER 31 The B-I Triangle CHAPTER 32 Cash Flow Management CHAPTER 33 Communications Management CHAPTER 34 Systems Management CHAPTER 35 Legal Management CHAPTER 36 Product Management P HASE F OUR Who Is a Sophisticated Investor? CHAPTER 37 How a Sophisticated Investor Thinks CHAPTER 38 Analyzing Investments CHAPTER 39 The Ultimate Investor CHAPTER 40 Are You the Next Billionaire? CHAPTER 41 Why Do Rich People Go Bankrupt? PHASE FIVE Giving It Back CHAPTER 42 Are You Prepared to Give Back? I N CONCLUSION Why It Does Not Take Money to Make Money…Anymore Rich Dad’s Guide to Investing The Introduction What You Will Learn from Reading this Book The Securities and Exchange Commission (SEC) of the United States defines an individual as an Accredited Investor if the individual has: 1. $200,000 or more in annual income or 2. $300,000 or more in annual income as a couple, or 3. $1 million or more in net worth. The SEC established these requirements to protect the average investor from some of the worst and most risky investments in the world. The problem is, these investor requirements also shield the average investor from some of the best investments in the world, which is one reason why rich dad’s advice to the average investor was, “Don’t be average.” Starting with Nothing This book begins with me returning from Vietnam in 1973. I had less than a year to go before I was going to be discharged from the Marine Corps. That meant that in less than a year, I was going to have no job, no money, and no assets. So this book begins at a point that many of you may recognize and that is a point of starting with nothing. Writing this book has been a challenge. I have written and rewritten it four times. The first draft began at the SEC’s Accredited Investor Level, the level that begins with a $200,000 minimum annual income. After the book was completed the first time, it was Sharon Lechter, my co-author, who reminded me of rich dad’s 90/10 rule of money. She said, “While this book is about the investments that the rich invest in, the reality is less than 10% of the population in America earn more than $200,000 a year. In fact, I believe it is less than 3% that earns enough to qualify as an Accredited Investor.” So the challenge of this book was to write about the investments the rich invest in, investments that begin at the minimum requirement of $200,000 in earnings and still include all readers regardless if they have money to invest or not. That was quite a challenge and why it required writing and rewriting the book four times. It now begins at the most basic of investor levels and goes to the most sophisticated investor level. Instead of beginning at the Accredited Investor level, the book now begins in 1973 because that is when I had no job, no money, and no assets. A point in life many of us have shared. All I had in 1973 was the dream of someday being very rich and becoming an investor who qualified to invest in the investments of the rich. Investments that few people ever hear about, or that are written about in the financial newspapers, or sold over the counter by investments brokers. This book begins when I had nothing but a dream and my rich dad’s guidance to become an investor who could invest in the investments of the rich. So regardless if you have very little money to invest or have a lot to invest today, and regardless if you know very little about investing or you know a lot about investing, this book should be of interest to you. It is written as simply as possible about a very complex subject. It is written to include anyone interested in becoming a better informed investor regardless of how much money they have. If this is your first book on investing, and you are concerned that it might be too complicated, please do not be concerned. All Sharon and I ask is that you have a willingness to learn and read this book from the beginning to the end with an open mind. If there are parts of the book that you do not understand, then just read the words but continue on to the end. Even if you do not understand everything, just by reading all the way through to the conclusion of this book, you will know more about the subject of investing than many people who are currently investing in the market. In fact, by reading the entire book, you will know a lot more about investing than many people who are giving investment advice and being paid to give their investment advice. This book begins with the simple and goes into the sophisticated without getting too bogged down in detail and complexity. In many ways, this book starts simple and remains simple although covering some very sophisticated investor strategies. This is a story of a rich man guiding a young man, with pictures and diagrams to help explain the often confusing subject of investing. The 90/10 Rule of Money My rich dad appreciated Italian economist, Vilfredo Pareto’s discovery of the 80/20 rule, also known as the Principle of Least Effort. Yet when it came to money, rich dad was more aware of the 90/10 rule which meant that 10% of the people always made 90% of the money. The September 13, 1999, issue of The Wall Street Journal ran an article supporting my rich dad’s point of view on the 90/10 rule of money. A section of the article read: “For all the talk of mutual funds for the masses, of barbers and shoe shine boys giving investment tips, the stock market has remained the privilege of a relatively elite group. Only 43.3% of all households owned any stock in 1997, the most recent year for which data is available, according to New York University economist Edward Wolf. Of those, many portfolios were relatively small. Nearly 90% of all shares were held by the wealthiest 10% of households. The bottom line: That top 10% held 73% of the country’s net worth in 1997, up from 68% in 1983.” In other words, even though more people are investing today, the rich continue to get richer. When it comes to stocks, the 90/10 rule of money holds true. Personally I am concerned because more and more families are counting on their investments to support them in the future. The problem is that while more people are investing very few of them are well educated investors. If or when the market crashes, what will happen to all these new investors? The federal government of the United States insures our savings from catastrophic loss but it does not insure our investments. That is why when I ask my rich dad, “What advice would you give the average investor?” His reply was, “Don’t be average.” How Not to Be Average I became very aware of the subject of investing when I was just 12 years old. Up until that age, the concept of investing was not really in my head. Baseball and football were on my mind but not investing. I had heard the word, but I had not really paid much attention to the word until I saw what the power of investing could do. I remember walking along a small beach with the man I call my rich dad and his son Mike, my best friend. Rich dad was showing his son and me this piece of real estate he had just purchased. Although only 12 years old, I did realize that my rich dad had just purchased one of the most valuable pieces of property in our town. Even though I was young I knew that oceanfront property with a sandy beach in front of it was more valuable than property without a beach on it. My first thought was, “How can Mike’s dad afford such an expensive piece of property?” I stood there with the waves washing over my bare feet looking at a man the same age as my real dad, who was making one of the biggest financial investments in his life. I was in awe of how he could afford such a piece of land. I knew that my dad made much more money because he was a highly paid government official with a bigger salary. But I also knew that my real dad could never afford to buy land right on the ocean. So how could Mike’s dad afford this land when my dad couldn’t? Little did I know that my career as a professional investor had begun the moment I realized the power built into the word “investing.” Some 40 years after that walk on the beach with my rich dad and his son Mike, I now have people asking me many of the same questions I began asking that day. In the investment classes I teach, people are now asking me similar questions. I began asking my rich dad questions such as: 1. “How can I invest when I don’t have any money?” 2. “I have $10,000 to invest. What would you recommend I invest in?” 3. “Do you recommend investing in real estate, mutual funds, or 4. 5. 6. 7. 8. stocks?” “Can I buy real estate or stocks without any money?” “Doesn’t it take money to make money?” “Isn’t investing risky?” “How do you get such high returns with low risk?” “Can I invest with you?” Today more and more people are beginning to realize the power hidden in the word investing. Many want to find out how to acquire that power for themselves. After reading this book, it is my intention that many of these questions will be answered for you and if not answered, it should inspire you to dig further to find the answers that work for you. Over 40 years ago, the most important thing my rich dad did for me was spark my curiosity on this subject of investing. My curiosity was aroused when I realized that my best friend’s dad, a man who made less money than my real dad, at least when comparing paycheck to paycheck, could afford to acquire investments that only rich people could afford. I realized that my rich dad had a power my real dad did not have and I wanted to have that power also. Many people are afraid of this power, stay away from it and many even fall victim to it. Instead of running from the power or condemning it by saying such things as, “The rich exploit the poor,” or “Investing is risky,” or “I’m not interested in becoming rich,” I became curious. It is my curiosity and my desire to acquire this power, also known as knowledge and abilities, that set me off on a life long path of inquiry and learning. Investing Like a Rich Person While this book may not give you all the technical answers you may want, the intention is to offer you an insight into how many of the richest self-made individuals made their money and went on to acquire great wealth. Standing on the beach at the age of 12, looking at my rich dad’s newly acquired piece of real estate, my mind was opened to a world of possibilities that did not exist in my home. I realized that it was not money that made my rich dad a rich investor. I realized that my rich dad had a thinking pattern that was almost exactly opposite and often contradicted the thinking of my real dad. I realized that I needed to understand the thinking pattern of my rich dad if I wanted to have the same financial power he had. I knew that if I thought like him I would be rich forever. I knew that if I did not think like him, I would never really be rich, regardless of how much money I had. Rich dad had just invested in one of the most expensive pieces of land in our town, and he had no money. I realized that wealth was a way of thinking and not a dollar amount in the bank. It is this thinking pattern of rich investors that Sharon and I want to deliver to you in this book, and why we rewrote the book four times. Rich Dad’s Answer Standing on the beach 40 years ago, I finally worked up the courage to ask my rich dad, “How can you afford to buy these 10 acres of very expensive oceanfront land, when my dad can’t afford it?” Rich dad then put his hand on my shoulder and gave me an answer I have never forgotten. With his arm draped over my shoulder, we turned and began walking down the beach at the water line and he began to warmly explain to me the fundamentals of the way he thought about money and investing. His answer began with, “I can’t afford this land either. But my business can.” We walked on the beach for an hour that day, rich dad with his son on one side and me on his other side. My investor lessons had begun. A few years ago, I was teaching a three-day investment course in Sydney, Australia. The first day and a half I spent discussing the ins and outs of building a business. Finally in frustration, a participant raised his hand and said, “I came to learn about investing. Why are you spending so much time on business?” My reply was, “There are two reasons. Reason number one is because what we ultimately invest in is a business. If you invest in stocks, you are investing in a business. If you buy a piece of real estate, such as an apartment building, that building is also a business. If you buy a bond, you are also investing in a business. In order to be a good investor, you first need to be good at business. Reason number two is the best way to invest is to have your business buy your investments for you. The worst way to invest is to invest as an individual. The average investor knows very little about business and often invests as an individual. That is why I spend so much time on the subject of business in an investment course.” And that is why this book will spend some time on how to build a business as well as how to analyze a business. I will also spend time on investing through a business because that is how rich dad taught me to invest. As he said to me 40 years ago, “I can’t afford to buy this land either. But my business can.” In other words my rich dad’s rule was “My business buys my investments. Most people are not rich because they invest as individuals and not as owners of businesses.” In this book, you will see why most of the 10% who own 90% of the stocks are owners of businesses and invest through their businesses and how you can do the same. Later in the course the individual understood why I spent so much time on business. As the course progressed, that individual and the class began to realize that the richest investors in the world do not buy investments, most of the 90/10 investors created their own investments. The reason we have billionaires who are still in their twenties is not because they bought investments. They created investments, called businesses, that millions of people want to buy. Nearly every day I hear people say, “I have an idea for a new product that will make millions.” Unfortunately most of those creative ideas will never be turned into fortunes. The second half of this book will focus on how the 10% turn their ideas into multi-million even multi-billion dollar businesses that other investors invest in. That is why rich dad spent so much time teaching me to build businesses as well as to analyze businesses to invest in. So if you have an idea that you think could make you rich, maybe even help you join the 90/10 club, the second half of this book is for you. Buy, Hold, and Pray Over the years rich dad pointed out that investing means different things to different people. Today I often hear people saying such things as: 1. “I just bought 500 shares of XYZ company for $5.00 a share, the 2. 3. 4. 5. 6. 7. price went up to $15.00 and I sold it. I made $5,000 in less than a week.” “My husband and I buy old houses, we fix them up and sell them for a profit.” “I trade commodity futures.” “I have over a million dollars in my retirement account.” “Safe as money in the bank.” “I have a diversified portfolio.” “I’m investing for the long term.” As rich dad said, “Investing means different things to different people.” While the above statements reflect different types of investment products and procedures, rich dad did not invest in the same way. He said instead, “Most people are not investors. Most people are speculators or gamblers. Most people have the ‘buy, hold, and pray the price goes up mentality.’ Most investors live in hopes that the market stays up and live in fear of the market crashing. A true investor makes money regardless if the market is going up or crashing down; they make money regardless if they are winning or losing, and they go both long and short. The average investor does not know how to do that and that is why most investors are average investors who fall into the 90% that make only 10% of the money.” More than Buying, Holding and Praying Investing meant more to rich dad than buying, holding, and praying. This book will cover such subjects as: 1. The 10 Investor Controls: Many people say that investing is risky. Rich dad said, “Investing is not risky. Being out of control is risky.” This book will go into rich dad’s 10 investor controls that can reduce risk and increase profits. 2. The 5 phases of rich dad’s plan to guide me from having no money to investing with a lot of money. Phase one of rich dad’s plan was preparing my mind to become a rich investor. This is a simple yet very important phase for anyone who wants to invest with confidence. 3. The different tax laws for different investors. In book number two, CASHFLOW Quadrant, I cover the four different people found in the world of business. They are: The E stands for employee. The S stands for Self-employed or small business. The B stands for business owner. The I stands for investor. The reason rich dad encouraged me to invest from the B quadrant is because the tax laws are better for investing from the B quadrant. Rich dad always said, “The tax laws are not fair; they are written for the rich and by the rich. If you want to be rich, you need to use the same tax laws the rich use.” One of the reasons why 10% of the people control most of the wealth is because only 10% know which tax laws to use. In 1943, the federal government plugged most tax loopholes for all employees. In 1986, the federal government took away the tax loopholes enjoyed by the B quadrant from individuals in the S quadrant, individuals such as doctors, lawyers, accountants, engineers, and architects. In other words, another reason 10% of the investors make 90% of the money is because only 10% of all investors know how to invest from the four different quadrants in order to gain different tax advantages. The average investor often only invests from one quadrant. 4. Why and how a true investor will make money regardless if the market goes up or crashes down. 5. The difference between Fundamental Investors and Technical Investors. 6. In CASHFLOW Quadrant, I went into the six levels of investors. This book starts at the last two levels of investors and further classifies them into the following types of investors: The Accredited Investor The Qualified Investor The Sophisticated Investor The Inside Investor The Ultimate Investor By the end of this book, you will know the different skill and education requirements between each different investor. 7. Many people say, “When I make a lot of money, my money problems will be over.” What they fail to realize is that having too much money is as big a problem as having not enough money. In this book you will learn the difference between the two kinds of money problems. One problem is the problem of not enough money. The other problem is the problem of too much money. Few people realize how big a problem having too much money can be. One of the reasons so many people go broke after making a lot of money, is because they do not know how to handle the problem of too much money. In this book you will learn how to start with the problem of having not enough money, how to make a lot of money and then how to handle the problem of too much money. In other words, this book will not only teach you how to make a lot of money but more importantly it will teach you how to keep it. As rich dad said, “What good is making a lot of money if you wind up losing it all?” A stockbroker friend of mine once said to me, “The average investor does not make money in the market. They do not necessarily lose money, they just fail to make money. I have seen so many investors make money one year and give it all back the next year.” 8. How to make much more than just $200,000, the minimum income level to begin investing in the investments of the rich. Rich dad said to me, “Money is just a point of view. How can you be rich if you think $200,000 is a lot of money? If you want to be a rich investor, you need to see that $200,000, the minimum dollar amount to qualify as an accredited investor, is just a drop in the bucket.” And that is why Phase One of this book is so important. 9. Phase One of this book, which is preparing yourself mentally to be a rich investor, has a short mental quiz for you at the end of each chapter. Although the quiz questions are simple, they are designed to have you think and maybe discuss your answers with the people you love. It was the soul searching questions my rich dad asked me that helped me find the answers I was looking for. In other words, many of the answers I was looking for, regarding the subject of investing, were really inside of me all along. What Makes the 90/10 Investor Different? One of the most important aspects of this book is the mental differences between the average investor and the 90/10 investor. Rich dad often said, “If you want to be rich, just find out what everyone else is doing and do exactly the opposite.” As you read this book you will find out that most of the differences between the 10% of investors who make 90% of the money and the 90% that make only 10% of the money is not what they invest in, but that their thinking is different. For example: 1. Most investors say “Don’t take risks.” The rich investor takes risks. 2. Most investors say “diversify.” The rich investor focuses. 3. The average investor tries to minimize debt. The rich investor increases debt in their favor. 4. The average investor tries to decrease expenses. The rich investor knows how to increase expenses to make themselves richer. 5. The average investor has a job. The rich investor creates jobs. 6. The average investor works hard. The rich investor works less and less to make more and more. The Other Side of the Coin So an important aspect of reading this book is to notice when your thoughts are often 180 degrees out from the guiding thoughts of my rich dad. Rich dad said, “One of the reasons so few people become rich is because they become set in one way of thinking. They think there is only one way to think or do something. While the average investor thinks ‘Play it safe and don’t take risks,’ the rich investor must also think about how to improve skills so he or she can take more risks.” Rich dad called this kind of thinking, “Thinking on both sides of the coin.” He went on to say “The rich investor must have more flexible thinking than the average investor. For example, while both the average investor and rich investor must think about safety, the rich investor must also think about how to take more risks. While the average investor thinks about cutting down debt, the rich investor is thinking about how to increase debt. While the average investor lives in fear of market crashes, the rich investor looks forward to market crashes. While this may sound like a contradiction to the average investor, it is this contradiction that makes the rich investor rich.” As you read through this book, be aware of the contradictions in thinking between average investors and rich investors. As rich dad said, “The rich investor is very aware that there are two sides to every coin. The average investor sees only one side. And it is the side the average investor does not see that keeps the average investor average and the rich investor rich.” The second part of this book is about the other side of the coin. Do You Want to Be More than an Average Investor? This book is much more than just a book about investing, hot tips, and magic formulas. One of the main purposes for writing it is to offer you the opportunity to gain a different point of view on the subject of investing. It begins with me returning from Vietnam in 1973 and preparing myself to begin investing as a rich investor. In 1973, rich dad began teaching me how to acquire the same financial power he possessed, a power I first became aware of at the age of 12. While standing on the sandy beach in front of my rich dad’s latest investment 40 years ago, I realized that when it came to the subject of investing, the difference between my rich dad and my poor dad went far deeper than merely how much money each man had to invest. The difference is first found in a person’s deep desire to be much more than just an average investor. If you have such a desire, then read on. FREE! A Special Audio Report from Robert Kiyosaki For Readers of Rich Dad’s Guide to Investing Only As our way of saying thank you for taking an active role in your financial education, Robert has prepared a special audio report. “My rich dad said that one of the most important investor skills an investor can learn is how to get rich when a market is crashing. When everyone else is panicking and selling, how do you stay calm, stay in the market and make a lot of money?” Please listen to “My Rich Dad Said, ‘Profit Don’t Panic’” All you have to do to get this audio report is visit our special website at www.richdadbook3.com, and the report is yours free. Thank you and good luck. Phase One Are You Mentally Prepared to Be an Investor? Investor Control #1 Control Over Yourself Chapter 1 What Should I Invest In? In 1973, I returned home from my tour of Vietnam. I felt fortunate to have been assigned to a base in Hawaii near home rather than to a base on the East Coast. After settling in at the Marine Corps Air Station, I called my friend Mike and we set up a time to have lunch together with his dad, the man I call my rich dad. Mike was anxious to show me his new baby and his new home so we agreed to have lunch at his house the following Saturday. When Mike’s limousine came to pick me up at the drab gray base BOQ, the Bachelor Officers’ Quarters, I began to realize how much had changed since we had graduated together from high school in 1965. “Welcome home,” Mike said as I walked into the foyer of his beautiful home with marble floors. Mike was beaming from ear to ear as he held his seven-month-old son. “Glad you made it back in one piece.” “So am I,” I replied as I looked past Mike at the shimmering blue Pacific Ocean, which touched the white sand in front of his home. The home was spectacular. It was a tropical one-level mansion with all the grace and charm of old and new Hawaiian living. There were beautiful Persian carpets, tall dark green potted plants, and a large pool that was surrounded on three sides by his home, with the ocean on the fourth side. It was very open, breezy, and the model of gracious island living with the finest of detail. The home fit my fantasies of living the luxurious life in Hawaii. “Meet my son James,” said Mike. “Oh,” I said in a startled voice. My jaw must have been hanging open as I had slipped into a trance taking in the stunning beauty of this home. “What a cute kid.” I replied as any person should reply when looking at a new baby. But as I stood there waving and making faces at a baby blankly staring back at me, my mind was still in shock at how much had changed in eight years. I was living on a military base in old barracks, sharing a room with three other messy beer-drinking young pilots, while Mike was living in a multi-million-dollar estate with his gorgeous wife and newborn baby. “Come on in,” Mike continued. “Dad and Connie are waiting for us on the patio.” The lunch was spectacular and served by their full-time maid. I sat there enjoying the meal, the scenery, and the company when I thought about my three roommates who were probably dining at the officer’s mess hall at that very moment. Since it was Saturday, lunch on the base was probably a sub sandwich and a bowl of soup. After the pleasantries and catching up on old times was over, rich dad said, “As you can see, Mike has done an excellent job investing the profits from the business. We have made more money in the last two years than I made in the first twenty. There is a lot of truth to the statement that the first million is the hardest.” “So business has been good?” I asked, encouraging further disclosure on how their fortunes had jumped so radically. “Business is excellent,” said rich dad. “These new 747s bring so many tourists from all over the world to Hawaii that business cannot help but keep growing. But our real success is from our investments more than our business. And Mike is in charge of the investments.” “Congratulations,” I said to Mike. “Well done.” “Thank you,” said Mike. “But I can’t take all the credit. It’s dad’s investment formula that is really working. I’m just doing exactly what he has been teaching us about business and investing for all these years.” “It must be paying off,” I said. “I can’t believe you live here in the richest neighborhood in the city. Do you remember when we were poor kids, running with our surfboards between houses trying to get to the beach?” Mike laughed. “Yes I do. And I remember being chased by all those mean old rich guys. Now I’m the mean old rich guy who is chasing those kids away. Who would have ever thought that you and I would be living . . . ?” Mike suddenly stopped talking once he realized what he was saying. He realized that while he was living here, I was living on the other side of the island in drab military barracks. “I’m sorry,” he said. “I . . . didn’t mean to…” “No apologies necessary,” I said with a grin. “I’m happy for you. I’m glad you’re so wealthy and successful. You deserve it because you took the time to learn to run the business. I’ll be out of the barracks in a couple of years as soon as my contract with the Marine Corps is done.” Rich dad, sensing the tension between Mike and me, broke in and said, “And he’s done a better job than I have. I’m very proud of him. I’m proud of both my son and his wife. They are a great team and have earned everything they have. Now that you’re back from the war, it’s your turn Robert.” May I Invest With You? “I’d love to invest with you,” I eagerly replied. “I saved nearly $3,000 while I was in Vietnam and I’d like to invest it before I spend it. Can I invest with you?” “Well, I’ll give you the name of a good stockbroker,” rich dad said. “I’m sure he’ll give you some good advice, maybe even a hot tip or two.” “No, no, no,” I said. “I want to invest in what you are investing in. Come on. You know how long I’ve known you two. I know you’ve always got something that you’re working on or investing in. I don’t want to go to a stockbroker. I want to be in a deal with you guys.” The room went silent as I waited for rich dad or Mike to respond. The silence grew into tension. “Did I say something wrong?” I asked finally. “No,” said Mike. “Dad and I are investing in a couple of new projects that are exciting but I think it is best you call one of our stockbrokers first and begin investing with him.” Again there was silence, punctuated only by the clinking of the dishes and glasses as the maid cleared the table. Mike’s wife Connie excused herself and took the baby to another room. “I don’t understand,” I said. Turning to rich dad more than Mike, I continued, “All these years I’ve worked right along side the two of you building your business. I’ve worked for close to nothing. I went to college as you advised and I fought for my country as you said a young man should. Now that I’m old enough and I finally have a few dollars to invest, you seem to hesitate when I say I want to invest in what you invest in. I don’t understand. Why the cold shoulder—are you trying to snub me or push me away? Don’t you want me to get rich like you?” “It’s not a cold shoulder,” Mike replied. “And we would never snub you or not wish you to attain great wealth. It’s that things are different now.” Rich dad nodded his head in slow and silent agreement. “We’d love to have you invest in what we invest in,” rich dad finally said. “But it would be against the law.” “Against the law?” I echoed in loud disbelief. “Are you two doing something illegal?” “No, no,” said rich dad with a chuckle. “We would never do anything illegal. It’s too easy to get rich legally to ever risk going to jail for something illegal.” “And it is because we want to always remain on the right side of the law that we say it would be illegal for you to invest with us,” said Mike. “It’s not illegal for Mike and me to invest in what we invest in. But it would be illegal for you,” rich dad tried to summarize. “Why?” I asked. “Because you’re not rich,” said Mike softly and gently. “What we invest in is for rich people only.” Mike’s words went straight through me. Since he was my best friend, I knew they were difficult words for him to say to me. And although he said them as gently as possible, they still hurt and cut like a knife through my heart. I was beginning to sense how wide the financial gap between us was. While his dad and my dad both started out with nothing, he and his dad had achieved great wealth. My dad and I were still from the other side of the tracks, as they say. I could sense that this big house with the lovely white-sand beach was still far away for me, and the distance was measured in more than miles. Leaning back in my chair and crossing my arms in introspective thought, I sat there nodding quietly as I summarized that moment in our lives. We were both 25 years old but in many ways, Mike was 25 years ahead of me financially. My own dad had just been more or less fired from his government job and he was starting over with nothing at age 52. I had not even begun. “Are you OK?” asked rich dad gently. “Yeah, I’m OK,” I replied, doing my best to hide the hurt that came from feeling sorry for myself and for my family. “I’m just doing some deep thinking and some soul searching,” I said, mustering a brave grin. The room was silent as we listened to the waves and as the cool breeze blew through the beautiful home. Mike, rich dad, and I sat there while I came to terms with the message and its reality. “So I can’t invest with you because I’m not rich,” I finally said as I came out of my trance. “And if I did invest in what you invest in, it would be against the law?” Rich dad and Mike nodded. “In some instances,” Mike added. “And who made this law?” I asked. “The federal government,” Mike replied. “The SEC,” rich dad added. “The SEC?” I asked. “What is the SEC?” “The Securities and Exchange Commission,” rich dad responded. “It was created in the 1930s under the direction of Joseph Kennedy, father of our late President John Kennedy.” “Why was it created?” I asked. Rich dad laughed. “It was created to protect the public from wild unscrupulous dealmakers, businessmen, brokers, and investors.” “Why do you laugh?” I asked. “It seems like that would be a good thing to do.” “Yes, it is a very good thing,” rich dad replied, still chuckling a little. “Prior to the stock market crash of 1929, many shady, slippery, and shoddy investments were being sold to the public. A lot of lying and misinformation was being put forth. So the SEC was formed to be the watchdog. It is the agency that helps make—as well as enforce—the rules. It serves a very important role. Without the SEC, there would be chaos.” “So why do you laugh?” I persisted. “Because while it protects the public from the bad investments, it also keeps the public out of the best investments,” replied rich dad in a more serious tone. “So if the SEC protects the public from the worst investments and from the best investments, what does the public invest in?” I asked. “The sanitized investments,” rich dad replied. “The investments that follow the guidelines of the SEC.” “Well, what is wrong with that?” I asked. “Nothing,” said rich dad. “I think it’s a good idea. We must have rules and enforce the rules. The SEC does that.” “But why the chuckle?” I asked. “I’ve known you too many years and I know you are holding back something that is causing you to laugh.” “I’ve already told you,” said rich dad. “I chuckle because in protecting the public from the bad investments, the SEC also protects the public from the best investments.” “Which is one of the reasons the rich get richer?” I asked tenuously. “You got it,” said rich dad. “I chuckle because I see the irony in the big picture. People invest because they want to get rich. But because they’re not rich, they’re not allowed to invest in the investments that could make them rich. Only if you’re rich can you invest in a rich person’s investments. And so the rich get richer. To me, that is ironic.” “But why is it done this way?” I asked. “Is it to protect the poor and middle class from the rich?” “No, not necessarily,” Mike responded. “I think it is really to protect the poor and the middle class from themselves.” “Why do you say that?” I asked. “Because there are many more bad deals than good deals. If a person is not aware, all deals—good and bad—look the same. It takes a great deal of education and experience to sort the more sophisticated investments into good and bad investments. To be sophisticated means you have the ability to know what makes one investment good and the others dangerous. And most people simply do not have that education and experience,” said rich dad. “Mike, why don’t you bring out the latest deal we are considering?” Mike left the table for his office and returned with a three-ring binder that was about two inches thick filled with pages, pictures, figures, and maps. “This is an example of something we would consider investing in,” said Mike as he sat down. “It is known as a non-registered security. This particular investment is sometimes called a private placement memorandum.” My mind went numb as Mike flipped though the pages and showed me the graphs, charts, maps, and pages of written text that described the risks and rewards of the investment. I felt drowsy as Mike explained what he was looking at and why he thought it was such a great investment opportunity. Rich dad, seeing me begin to fade away with the overload of unfamiliar information, stopped Mike and said, “This is what I wanted Robert to see.” Rich dad then pointed to a small paragraph at the front of the book that read “Exemptions from the Securities Act of 1933.” “This is what I want you to understand,” he said. I leaned forward to be better able to read the fine print his finger was pointing to. The fine print said, “This investment is for accredited investors only. An accredited investor is generally accepted to be someone who: has a net worth of $1 million or more; or has had an annual income of $200,000 or more in each of the most recent years (or $300,000 jointly with a spouse) and who has a reasonable expectation of reaching the same income level in the current year.” Leaning back in my chair, I said, “This is why you say I cannot invest in what you invest in. This investment is for rich people only.” “Or people with high incomes,” said Mike. “Not only are these guidelines tough, but the minimum amount you can invest in this investment is $35,000. That is how much each investment ‘unit,’ as it is called, costs.” “$35,000!” I said with a gasp. “That is a lot of money and a lot of risk. You mean that is the least someone can invest in this deal?” Rich dad nodded. “How much does the government pay you as a Marine Corps pilot?” “I was earning about $12,000 a year with flight pay and combat pay in Vietnam. I really don’t know what my pay will be here now that I am stationed in Hawaii. I might get some COLA, cost of living allowance, but it sure isn’t going to be much, and it certainly will not cover the cost of living in Hawaii.” “So for you to have saved $3,000 was quite an accomplishment,” said rich dad, doing his best to cheer me up. “You saved nearly 25% of your gross income.” I nodded yet silently I realized how very, very far behind I was from becoming a so-called accredited investor. I realized that even if I became a General in the Marine Corps, I would probably not earn enough money to be considered an accredited investor. Not even the president of the United States, unless he or she were already rich, could qualify on salary alone. “So what should I do?” I finally asked. “Why can’t I just give you my $3,000 and you combine it with your money and we split the profits when the deal pays off?” “We could do that,” said rich dad. “But I wouldn’t recommend it. Not for you anyway.” “Why?” I asked. “Why not for me?” “You already have a pretty good financial education foundation. So you can go way beyond just being an accredited investor. If you want, you could become a sophisticated investor. Then you will find wealth far beyond your wildest dreams.” “Accredited investor? Sophisticated investor? What’s the difference?” I asked, actually feeling a spark of renewed hope. “Good question,” Mike said with a smile, sensing that his friend was coming out of a slump. “An accredited investor is by definition someone who qualifies because he or she has money. That is why an accredited investor is often called a qualified investor,” rich dad explained. “But money alone does not qualify you to be a sophisticated investor.” “What is the difference?” I asked. “Well, did you see the headlines in yesterday’s newspaper about the Hollywood movie star who lost millions in an investment scam?” asked rich dad. I nodded my head saying, “Yes I did. Not only did he lose millions, he had to pay the tax department for untaxed income that went into that deal.” “Well, that is an example of an accredited or qualified investor,” rich dad continued. “But just because you have money does not mean you’re a sophisticated investor. This is why we often hear of so many high-income people such as doctors, lawyers, rock stars, and professional athletes losing money in less-than-sound investments. They have the money but they lack the sophistication. They have money but don’t know how to invest it safely and for high returns. All the deals look the same to them. They can’t tell a good investment from a bad one. People like them should stay only in sanitized investments or hire a professional money manager they trust to invest for them.” “So what is your definition of a sophisticated investor?” I asked. “A sophisticated investor knows the 3-Es,” said rich dad. “The 3-Es,” I repeated. “What are the 3-Es?” Rich dad then turned over the private placement memorandum we were looking at and wrote the following on the back of one of the pages. 1. Education 2. Experience 3. Excessive cash “Those are the 3-Es,” he said, looking up from the page. “Achieve those three items and you will be a sophisticated investor.” Looking at the three items, I said, “So the movie star had excessive cash, but he lacked the first two items.” Rich dad nodded. “And there are many people with the right education but they lack the experience, and without real life experience, they often lack the excessive cash.” “People like that often say, ‘I know’ when you explain things to them, but they do not do what they know,” added Mike. “Our banker always says, ‘I know’ to what dad and I do, but for some reason, he does not do what he claims he knows.” “And that is why your banker lacks the excessive cash,” I said. Rich dad and Mike nodded. Again, the room went silent as the conversation ended. All three of us were deep in our own private thoughts. Rich dad signaled the maid for more coffee and Mike began putting the three-ring binder away. I sat with my arms crossed, gazing out upon the deep blue Pacific Ocean at Mike’s beautiful home and contemplating my next direction in life. I had finished college as my parents had wished, my military obligation would soon be over, and then I would be free to choose the path that was best for me. “What are you thinking about?” asked rich dad, sipping from his fresh cup of coffee. “I’m thinking about what I want to become now that I have grown up,” I replied. “And what is that?” asked Mike. “I’m thinking that maybe I should become a sophisticated investor,” I replied quietly. “Whatever that is.” “That would be a wise choice,” said rich dad. You’ve got a pretty good start, a financial education foundation. Now it’s time to get some experience.” “And how will I know when I have enough of both?” I asked. “When you have excessive cash,” smiled rich dad. With that, the three of us laughed and raised our water glasses, toasting, “To excessive cash.” Rich dad then toasted, “And to being a sophisticated investor.” “To being a sophisticated investor and to excessive cash,” I repeated again silently to myself. I liked the ring of those words in my head. Mike’s limousine driver was summoned and I returned to my dingy bachelor officers quarters to think about what I was going to do with the rest of my life. I was an adult and I had fulfilled my parents’ expectations . . . expectations such as getting a college education and serving my country during a time of war. It was now time for me to decide what I wanted to do for myself. The thought of studying to become a sophisticated investor appealed to me. I could continue my education with rich dad as I gained the experience I needed. This time, my rich dad would be guiding me as an adult. 20 Years Later By 1993, rich dad’s wealth was split between his children, grandchildren, and their future children. For the next hundred years or so, his heirs would not have to worry about money. Mike received the primary assets of the business and has done a magnificent job of growing the balance of rich dad’s financial empire, a financial empire that rich dad had built from nothing. I had seen it start and grow during my lifetime. It took me 20 years to achieve what I thought I should have been able to do in 10 years. There is some truth to that saying, “It’s the first million that is the hardest.” In retrospect, making $1 million was not that difficult. It’s keeping the million and having it work hard for you that I found to be difficult. Nevertheless, I was able to retire in 1994 at the age of 47, financially free with ample money with which to enjoy life. Yet, it was not retirement that I found exciting. It was finally being able to invest as a sophisticated investor that was exciting. To be able to invest alongside Mike and rich dad was a goal worth achieving. That day back in 1973, when Mike and rich dad said I was not rich enough to invest with them, was a turning point in my life and the day I set the goal to become a sophisticated investor. The following is a list of some of the investments in which so-called “Accredited Investors and Sophisticated Investors” invest: 1. 2. 3. 4. Private placements Real estate syndication and limited partnerships Pre-initial public offerings (IPOs) IPOs (while available to all investors, IPOs are not usually easily accessible) 5. 6. 7. 8. Sub-prime financing Mergers and acquisitions Loans for startups Hedge funds For the average investor, these investments are too risky, not because the investment itself is necessarily risky, but because all too often, the average investor lacks the education, experience, and excessive capital to know what he or she is getting into. I now tend to side with the SEC that it is better to protect unqualified investors by restricting their access to these types of investments because I made some errors and false steps along the way. As a sophisticated investor today, I now invest in such ventures. If you know what you’re doing, the risk is very low while the potential reward can be huge. Investments such as these are where the rich routinely invest their money. Although I have taken some losses, the returns on the investments that do well have been spectacular, far exceeding the few losses. A 35% return on capital is normal, but returns of 1,000% and more are occasionally achieved. I would rather invest in these investments because I find them more exciting and more challenging. It’s not simply a matter of “Buy me 100 shares of this or sell 100 shares of that.” Nor is it “Is the p/e high or is the p/e low?” That is not what being a sophisticated investor is about. Investing in these investments is about getting very close to the engine of Capitalism. In fact, some of the investments listed are venture capital investments, which for the average investor are far too risky. In reality, the investments are not risky, it’s the lack of education, experience, and excessive cash that makes the average investor risky. This Book is not about investments. This Book is about the investor. The Path This book is not necessarily about investments. This book is about the investor specifically, and the path to becoming a sophisticated investor. It is about you finding your path to acquiring the 3-Es: education, experience, and excessive cash. Rich Dad Poor Dad is a book about my educational path as a child. CASHFLOW Quadrant is Rich Dad Poor Dad part II and is my educational path as a young adult between the years 1973 and 1994. This book, Rich Dad’s Guide to Investing, builds on the lessons from all previous years with my real life experiences and converts the lessons into the 3-E’s in order to qualify as a sophisticated investor. In 1973, I barely had $3,000 to invest and I did not have much education and real-life experience. By 1994, I had become a sophisticated investor. Over 20 years ago, rich dad said, “Just as there are houses for the rich, the poor, and the middle class, there are investments for each of them. If you want to invest in investments that the rich invest in, you have to be more than rich. You need to become a sophisticated investor, not just a rich person who invests.” The Five Phases of Becoming a Sophisticated Investor Rich dad broke my development program into five distinct phases, which I have organized into phases, lessons, and chapters. The phases are: 1. 2. 3. 4. 5. Are You Mentally Prepared to Be an Investor? What Type of Investor Do You Want to Become? How Do You Build a Strong Business? Who Is the Sophisticated Investor? Giving It Back. This book is written as a guide. It will not give you specific answers. The purpose of this book is to help you understand what questions to ask. And if this book does that, it has done its job. Rich dad said, “You cannot teach someone to be a sophisticated investor. But a person can learn to become a sophisticated investor. It’s like learning to ride a bicycle. I cannot teach you to ride a bicycle, but you can learn to ride a bicycle. Learning to ride a bicycle requires risk, trial and error, and proper guidance. The same is true with investing. If you do not want to take risks, then you’re saying you do not want to learn. And if you do not want to learn, then I cannot teach you.” If you’re looking for a book on hot investment tips, or how to get rich quick, or the secret investment formula of the rich, this book is not for you. This book is really about learning more than investing. It is written for people who are students of investing, students who seek their own path to wealth rather than look for the easy road to wealth. This book is about rich dad’s five phases of development, the five phases that he went through and that I am currently going through. If you are a student of great wealth, you may notice while reading this book that rich dad’s five phases are the same five phases that the richest business people and investors in the world went through in order to become very, very rich. Bill Gates, founder of Microsoft; Warren Buffet, America’s richest investor; and Thomas Edison, founder of General Electric, all went through these five phases. They are the same five phases that the young new millionaires and billionaires of the Internet or the “dot com” generation are currently going through while still in their twenties and thirties. The only difference is that because of the Information Age, these young people went through the same phases faster . . . and maybe so can you. Are You Part of the Revolution? Great wealth, vast fortunes, and mega-rich families were created during the Industrial Revolution. The same is going on today during the Information Revolution. I find it interesting that today we have self-made multi-millionaires and billionaires who are twenty, thirty, and forty years of age; yet we still have people forty and over having a tough time hanging on to $50,000-a-year jobs. One reason causing this great disparity is the shift from the Industrial Age to the Information Age. When we shifted into the Industrial Age, people like Henry Ford and Thomas Edison became billionaires. Today, shifting into the Information Age, we have Bill Gates, Michael Dell, and the founders of the Internet companies becoming young millionaires and billionaires. These twenty-somethings will soon be passing Bill Gates—who is old at 39—in wealth. That is the power of a shift in ages, the shift from the Industrial Age to the Information Age. It has been said that there is nothing so powerful as an idea whose time has come . . . and there is nothing so detrimental than someone who is still thinking old ideas. For you, this book may be about looking at old ideas and possibly finding new ideas for wealth. It may also be about a paradigm shift in your life. It may be about a transition as radical as the shift from the Industrial Age to the Information Age. It may be about you defining a new financial path for your life. It may be about thinking more like a businessperson and investor rather than an employee or a self-employed person. It took me years to go through the phases, and in fact, I am still going through them. After reading this book, you may consider going through the same five phases or you may decide that this developmental path is not for you. If you decide to embark upon the same path, how fast you choose to go through these five phases of development is up to you. Remember that this book is not about getting rich quickly. The choice to undergo such a personal development and education program begins in phase one . . . the phase of mental preparation. Are You Mentally Prepared to Be an Investor? Rich dad often said, “Money will be anything you want it to be.” What he meant was that money comes from our minds, our thoughts. If a person says, “Money is hard to get,” it will probably be hard to get. If a person says, “Oh I’ll never be rich,” or “It’s really hard to get rich,” it will probably be true for that person. If a person says, “The only way to get rich is to work hard,” then that person will probably work hard. If the person says, “If I had a lot of money, I would put it in the bank because I wouldn’t know what to do with it,” then it will probably happen just that way. You’d be surprised how many people think and do just that. And if a person says, “Investing is risky,” then it is. As rich dad said, “Money will be anything you want it to be.” Rich dad warned me that the mental preparation needed to become a sophisticated investor was probably similar to the mental preparation it would take to climb Mt. Everest, or to prepare for the priesthood. He was kidding, yet he was putting me on notice that such an undertaking was not to be taken lightly. He said to me, “You start as I did. You start without any money. All you have is hope and a dream of attaining great wealth. While many people dream of it, only a few achieve it. Think hard and prepare mentally because you are about to learn to invest in a way that very few people are allowed to invest. You will see the investment world from the inside rather than from the outside. There are far easier paths in life and easier ways to invest. So think it over and be prepared if you decide this is the path for your life.” Chapter 2 Pouring a Foundation of Wealth Returning to the dingy gray officers’ quarters on base that night was very difficult. They had been fine when I left earlier that day, but after spending the afternoon in Mike’s new home, the officers’ quarters seemed cheap, old, and tired. As expected, my three roommates were drinking beer and watching a baseball game on television. There were pizza boxes and beer cans everywhere. They did not say much as I passed through the shared living area. They just stared at the TV set. As I retired to my room and closed the door, I felt grateful that we all had private rooms. I had much to think about. At 25 years of age, I finally realized things that I could not understand as a kid of 9, the age at which I first began working with rich dad. I realized that my rich dad had been working hard for years pouring a solid foundation of wealth. They had started on the poor side of town, living frugally, building businesses, buying real estate, and working on their plan. I now understood that rich dad’s plan was to become very wealthy. While Mike and I were in high school, rich dad had made his move by expanding to different islands of the Hawaiian chain, buying businesses and real estate. While Mike and I were in college, he made his big move and became one of the major private investors in businesses in Honolulu and parts of Waikiki. While I was flying for the Marine Corps in Vietnam, his foundation of wealth was set in place. It was a strong and firm foundation. Now he and his family were enjoying the fruits of their labor. Instead of living in the poorest of neighborhoods on an outer island, they lived in one of the wealthiest neighborhoods in Honolulu. They did not just look rich on the surface as many of the people in that neighborhood did. I knew that Mike and his dad were rich because they allowed me to review their audited financial statements. Not many people were given that privilege. My real dad, on the other hand, had just lost his job. He had been climbing the ladder in the state government when he fell from grace from the political machine that ran the State of Hawaii. My dad lost everything he had worked to achieve when he ran against his boss for governor and lost. He had been blacklisted from state government and was trying to start over. He had no foundation of wealth. Although he was 52 and I was 25, we were in exactly the same financial position. We had no money. We both had a college education and we could both get another job, but when it came to real assets, we had nothing. That night, lying quietly on my bunk, I knew I had a rare opportunity to choose a direction for my life. I say rare because very few people have the luxury of comparing the life paths of two fathers and then choosing the path that was right for them. It was a choice I did not take lightly. Investments of the Rich Although many things ran through my mind that night, I was most intrigued by the idea that there were investments only for the rich, and then there were investments for everyone else. I remembered that when I was a kid working for rich dad, all he talked about was building his businesses. But now that he was rich, all he talked about was his investments . . . investments for the rich. That day over lunch, he had explained, “The only reason I built businesses was so I could invest in the investments of the rich. The only reason you build a business is so that your business can buy your assets. Without my businesses, I could not afford to invest in the investments of the rich.” Rich dad went on to stress the difference between an employee buying an investment and a business buying an investment. He said, “Most investments are too expensive when you purchase them as an employee. But they are much more affordable if my business buys them for me.” I did not know what he meant by that statement, but I knew this distinction was important. I was now curious and anxious to find out what the difference was. Rich dad had studied corporate and tax law and had found ways to make a lot of money using the laws to his advantage. I drifted off that night excited about calling rich dad in the morning and saying softly to myself, “investments of the rich.” The Lessons Resume I had spent many hours as a child sitting at a table in one of rich dad’s restaurants as rich dad discussed the affairs of his business. At these discussions, I would sit and sip my soda, while rich dad talked with his bankers, accountants, attorneys, stockbrokers, real estate brokers, financial planners, and insurance agents. It was the beginning of my business education. Between the ages of 9 and 18, I spent hours listening to these men and women solve intricate business problems. But those lessons around the table ended when I left for four years of college in New York, followed by five years of service with the Marine Corps. Now that my college education was complete and my military duty nearly over, I was ready to continue the lessons with rich dad. When I called him the next day, he was ready to begin my lessons again. He had turned the businesses over to Mike and was now semiretired. He was looking for something to do rather than play golf all day. When I was young, I did not know which dad to listen to when it came to the subject of money. Both were good, hard-working men. Both were strong and charismatic. Both said I should go to college and serve my country in the military. But they did not say the same things about money or give the same advice about what to become when I grew up. Now I could compare the results of the career paths chosen by my rich dad and my poor dad. In CASHFLOW Quadrant, the book that follows Rich Dad Poor Dad, my poor dad advised me to “Go to school, get good grades, and then find a safe secure job with benefits.” He was recommending a career path in this direction: On the other hand, my rich dad said, “Learn to build businesses and invest through your businesses.” He was recommending a career path that looked like this: The CASHFLOW Quadrant is about the core emotional differences and the technical differences among the people found in each of the quadrants. These core emotional and technical differences are important because they ultimately determine which quadrant a person tends to favor and operate from. For example, a person who needs job security will most likely seek the E quadrant. In the E quadrant are people from janitors to presidents of companies. A person who needs to do things on his or her own is often found in the S quadrant, the quadrant of the self-employed or small business. I also say that “S” stands for solo and smart, because this is where many of the professionals such as doctors, attorneys, accountants, and other technical consultants are found. The CASHFLOW Quadrant explains a lot about the difference between the S quadrant—which is where most small-business owners operate—and the B quadrant—which is the quadrant where big businesses are found. In this book, we will go into much more detail about the technical differences, because it is here that the differences between the rich and everyone else are found. The Tax Laws Are Different The differences between the quadrants play a very important role in this book. The tax laws are different for the different quadrants. What may be legal in one quadrant is illegal in another. These subtle differences make big differences when it comes to the subject of investing. When discussing the subject of investing, my rich dad was very careful to ask me from which quadrant I was planning to earn my money. The Lessons Begin While Mike was busy running their empire, rich dad and I were having lunch at a hotel on Waikiki Beach. The sun was warm, the ocean beautiful, the breeze light, and the setting as close to paradise as you can get. Rich dad was shocked to see me walk in wearing my uniform. He had never seen me in uniform before. He had only seen me as a kid, dressed in casual clothes such as shorts, jeans, and T-shirts. I guess he finally realized that I had grown up since leaving high school, and by now had seen a lot of the world and fought in a war. I had worn my uniform to the meeting because I was between flights and had to get back to the base to fly that evening. “So that is what you have been doing since leaving high school,” said rich dad. I nodded my head and said, “Four years at the military academy in New York, and four years in the Marine Corps. One more year to go.” “I am very proud of you,” said rich dad. “Thanks,” I replied. “But it will be nice to get out of a military uniform. It’s really tough being spit on or stared at, or called ‘baby-killers’ by all these hippies and people who are against the war. I just hope it ends soon for all of us.” “I’m just glad Mike did not have to go,” said rich dad. “He wanted to enlist but his poor health kept him out.” “He was fortunate,” I replied. “I lost enough friends to that war. I would have hated to have lost Mike too.” Rich dad nodded his head and asked, “So what are your plans once your military contract is up next year?” “Well, three of my friends have been offered jobs with the airlines as pilots. It’s tough getting hired right now but they say they can get me in through some contacts they have.” “So you’re thinking of flying with the airlines?” asked rich dad. I nodded slowly. “Well, that’s all I’ve been doing . . . thinking about it. The pay is OK, and benefits are good. And besides, my flight training has been pretty intense,” I said. “I’ve become a pretty good pilot after flying in combat. If I fly for a year with a small airline and get some multi-engine time, I will be ready for the major carriers.” “So is that what you think you are going to do?” asked rich dad. “No,” I replied. “Not after what has happened to my dad and after having lunch at Mike’s new home. I lay awake for hours that night and I thought about what you said about investing. I realized that if I took a job with the airlines I might someday become an accredited investor. But I realized that I might never go beyond that level.” Rich dad sat in silence, nodding ever so slightly. “So what I said hit home,” rich dad said in a low voice. “Very much so,” I replied. “I reflected on all the lessons you gave me as a kid. Now I am an adult and the lessons have a new meaning to me.” “And what did you remember?” asked rich dad. “I remember you taking away my 10 cents per hour and making me work for free,” I replied. “I remembered that lesson of not becoming addicted to a paycheck.” Rich dad laughed at himself and said, “That was a pretty tough lesson.” “Yes it was,” I replied. “But a great lesson. My dad was really angry with you. But now he is the one trying to live without a paycheck. The difference is he’s 52 and I was 9 when I got that lesson. After lunch at Mike’s, I vowed that I would not spend my life clinging to job security just because I needed a paycheck. That is why I doubt that I will seek a job with the airlines. And that is why I’m here having lunch with you. I want to review your lessons on how to have money work for me, so I don’t have to spend my life working for money. But this time, I want your lessons as an adult. Make the lessons harder and give me more detail.” “And what was my first lesson?” asked rich dad. “The rich don’t work for money,” I said promptly. “They know how to have money work for them.” A broad smile came over rich dad’s face. He knew that I had been listening to him all those years as a kid. “Very good,” he said. “And that is the basis of becoming an investor. All investors do is learn how to have their money work hard for them.” “And that is what I want to learn,” I said quietly. “I want to learn and maybe teach my dad what you know. He is in a very bad way right now, trying to start over again at the age of 52.” “I know,” said rich dad. “I know.” So on a sunny day, with surfers riding the beautiful waves of the deep blue ocean, my lessons on investing began. The lessons came in five phases, each phase taking me to a higher level of understanding… understanding the thought process of rich dad and his investment plan. The lessons began with preparing mentally and taking control of myself . . . because that is the only place that investing really takes place anyway. Investing ultimately begins and ends with taking control of yourself. The lessons on investment in Phase One of rich dad’s investment plan are all about the mental preparation it takes before actually beginning to invest. Lying in my bunk that night in 1973, in a dingy room on base, my mental preparation had begun. Mike was fortunate enough to have a father who had accumulated great wealth. I was not that fortunate. In many ways, he had a 50-year head start on me. I had yet to start. That night, I began my mental preparation by making a decision between job security as chosen by my poor dad, or pouring a foundation of real wealth as chosen by my rich dad. That is where the process of investing truly begins and where rich dad’s lessons on investing start. It starts with a very personal decision . . . a mental choice to be rich, poor, or middle class. It is an important decision, because whichever financial position in life you choose—be it rich, poor, or middle class—everything in your life then changes. Chapter 3 Investor Lesson #1: The Choice Rich dad’s lessons on investing began. “When it comes to money and investing, people have three fundamental reasons or choices for investing. They are: 1. To be secure, 2. To be comfortable, or 3. To be rich.” Rich dad went on to say, “All three choices are important. The difference in one’s life occurs when the choices are prioritized.” He continued by saying that most people make their money and investment choices in that exact order. In other words, their first choice when it comes to money decisions is security, second is comfort, and third is to be rich. That is why most people make job security their highest priority. After they have a secure job or profession, then they focus on comfort. The last choice for most people is to be rich. That day in 1973, rich dad said, “Most people dream of becoming rich, but it is not their first choice.” He went on to say, “Only three out of a hundred people in America are rich because of this priority of choices. For most people, if becoming rich disturbs their comfort or makes them feel insecure, they will forsake becoming rich. That is why so many people want that one hot investment tip. People who make security and comfort their first and second choices look for ways to get rich quick that are easy, risk free, and comfortable. A few people do get rich on one lucky investment, but all too often they lose it all again.” Rich or Happy I often hear people say, “I’d rather be happy than be rich.” That comment has always sounded very strange to me since I have been both rich and poor. And in both financial positions, I have been both happy and unhappy. I wonder why people think they have to choose between happiness and being rich. When I reflect upon this lesson, it occurs to me that what people are really saying is that “I’d rather feel secure and comfortable than be rich.” That is because if they felt insecure or uncomfortable, they were not happy. For me, I was willing to feel insecure and uncomfortable in order to be rich. I have been rich and poor as well as happy and unhappy. But I assure you that when I was poor and unhappy, I was much unhappier than when I was rich and unhappy. I have also never understood the statement “Money does not make you happy.” While there is some truth in it, I have always noticed that when I have money, I feel pretty good. The other day, I found a $10 bill in my jeans pocket. Even though it was only $10, it felt great finding it. Receiving money has always felt better than receiving a bill for money I owe. At least that is my experience with money. I feel happy when it comes in and sad when it leaves me. Back in 1973, I put my priorities in this order: 1. To be rich 2. To be comfortable 3. To be secure As stated earlier, when it comes to money and investing, all three priorities are important. Which order you put them in is a very personal decision that should be made before beginning to invest. My poor dad put “to be secure” as priority one, and rich dad put “to be rich” as priority one. Before beginning to invest, it is important to decide what your priorities are. Mental Attitude Quiz To be rich, comfortable, and secure are really personal core values. One is not better than the other. I do know, however, that making the choice of which core values are most important to you often has a significant long-term impact upon the kind of life you choose. That is why it is important to know which core values are most important to you, especially when it comes to the subject of money and financial planning. So the mental attitude quiz is: List in order of importance which core values are most important to you: 1. 2. 3. Some of you may need to work through your true feelings. Talk seriously with your spouse or mentor. Make “pro” and “con” lists. Knowing what your personal priorities are will save you many agonizing decisions and sleepless nights later. One of the reasons the 90/10 rule of money applies may be because 90% of the people choose comfort and security over being rich. Chapter 4 Investor Lesson #2: What Kind of World Do You See? One of the most startling differences between my rich dad and poor dad was what kind of world they saw. My poor dad always saw a world of financial scarcity. That view was reflected when he said, “Do you think money grows on trees?” or “Do you think I’m made of money?” or “I can’t afford it.” When I spent time with my rich dad, I began to realize that he saw a completely different world. He could see a world of too much money. That view was reflected when he said, “Don’t worry about money. If we do the right things, there will always be plenty of money,” or “Don’t let not having money be an excuse for not getting what you want.” In 1973, during one of rich dad’s lessons, he said, “There are only two kinds of money problems. One problem is not enough money. The other problem is too much money. Which type of money problem do you want?” In my classes on investing, I spend a lot of time on this subject. Most people come from families where the money problem was not enough money. Since money is only an idea, if your idea is that there is not enough money, then that is what your reality will be. One of the advantages I had, coming from two families, was that I could see both types of problems . . . and rest assured, both are problems. My poor dad always had problems of not enough money and my rich dad always had problems of too much money. Rich dad had a comment on that strange phenomenon. He said, “People who suddenly become rich—by things such as inheritance, a big jackpot from Las Vegas, or the lottery—suddenly become poor again because psychologically, all they know is a world of not enough money. So they lose all their suddenly found wealth and go back to repeating the only world of money they know: a world of not enough money.” One of my personal struggles was shaking the idea that the world was a world of not enough money. From 1973 on, rich dad had me become very aware of my thoughts when it came to the subjects of money, working, and becoming rich. Rich dad truly believed that poor people remained poor simply because that was the only world they knew. Rich dad would say, “Whatever your reality is about money inside of you is the reality of money outside of you. You cannot change your outside reality until you first change your inside reality about money.” Rich dad once outlined what he saw as some of the causes of scarcity as differences in peoples’ attitudes: 1. The more security your need, the more scarcity there is in your life. 2. The more competitive you are, the more scarcity in your life. Which is why people compete for jobs and promotions at work and compete for grades in school. 3. To gain more abundance a person needs more skills and needs to be more creative and cooperative. People who are creative, have good financial and business skills, and are cooperative often have lives of increasing financial abundance. I could see these differences in attitudes between my two dads. My real dad always encouraged me to play it safe and seek security. My rich dad encouraged me to develop skills and be creative. The second half of this book is about how to take your creative ideas and create a world of abundance rather than a world of scarcity. During our discussions about scarcity rich dad would break out a coin and say, “When a person says ‘I can’t afford it,’ that person sees only one side of the coin. The moment you say ‘How can I afford it?,’ you begin to see the other side. The problem is, even when people see the other side, they see it with only their eyes. That is why poor people see rich people doing what rich people do on the surface but they fail to see what rich people are doing inside their minds. If you want to see the other side of the coin, you have to see what is going on inside a very rich person’s mind.” The second half of this book is about what goes on in a rich person’s mind. Years later, when lottery winners began going broke I asked rich dad why this was happening. His reply was, “A person who suddenly comes into a lot of money and goes broke, goes broke because they still see only one side of the coin. In other words they handle the money in the same way they always did, which was the reason they were poor or struggled in the first place. They see only a world of not enough money. The safest thing that person can do is just put the money in the bank and live off the interest only. People who can see the other side of the coin would take that money and multiply it rapidly and safely. They can do that because they see the other side of the coin, the side of the coin where there is a world of too much money and they use their money to get to the other side faster while everyone else uses money to become poorer faster.” In the late 1980’s after rich dad retired and turned his empire over to Mike, he called me in for a brief meeting. Before the meeting began he showed me a bank statement with $39 million dollars in cash in it. I gasped as he said, “And this is only in one bank. I am retired now because it is a full time job to keep taking this cash out of my banks and moving it into more productive investments. I repeat it is a full time job that becomes more challenging every year.” As the meeting ended rich dad said, “I spent years training Mike to build the engine that produces this much money. Now that I am retired he is running the engine that I built. The reason I can retire with confidence is because Mike knows not only how to run the engine, he can fix it if it breaks. Most rich kids lose their parents’ money because although they grew up in extreme wealth, they never really learned how to build an engine or fix it after it is broken. In fact, too many rich kids are the very people who break the engine. They grew up on the rich side of the coin, but they never learned what it takes to get to that side. You have a chance, with my guidance, to make the transition and stay on the other side.” A big part of taking control of myself was taking control of my internal reality about money. I have had to constantly remind myself that there is a world of too much money, because in my heart and soul, I have often felt like a poor person. One of the exercises rich dad had me do whenever I felt the surge of panic in my heart and stomach, the panic that comes from the fear of not having enough money, was to simply say, “There are two kinds of money problems. One problem is not enough money and the other is too much money. Which one do I want?” I would ask this question mentally even though my core being was in a state of financial panic. I am not one of these wishful-thinking people or a person who believes solely in the power of affirmation. I asked myself that question to combat my inherited point of view on money. Once my gut was calmed down, I would then ask my mind to begin finding solutions to whatever was financially challenging me at the time. Solutions could mean seeking new answers, finding new advisors, or attending a class on a subject I was weak on. The main purpose for combating my core panic was to allow me to calm down so I could move forward again. I have noticed that most people let their panic about money defeat them and dictate the terms and conditions of their lives. Hence, they remain terrified about risk and money. As I wrote in CASHFLOW Quadrant, people’s emotions often run their lives. Emotions such as fear and doubt lead to low self-esteem and a lack of self-confidence. In the early 1990s, Donald Trump was nearly $1 billion in debt personally and $9 billion in debt corporately. An interviewer asked Trump if he was worried. Trump replied, “Worrying is a waste of time. Worrying gets in my way of working to solve these problems.” I have noticed that one of the main reasons people are not rich is that they worry too much about things that might never happen. Rich dad’s investment lesson #2 was to mentally choose to see both worlds . . . a world of not enough money and a world of too much money. Later, rich dad went into the importance of a financial plan. Rich dad strongly believed in having a financial plan for when you did not have enough money as well as a financial plan for when you will have too much money. He said, “If you do not have a plan for having too much money, then you will lose all your money and go back to the only plan you know, which is what 90% of the population knows: a world of not enough money.” Security and Scarcity Rich dad said, “The more a person seeks security the more scarcity they will have in their life. Security and scarcity go hand in hand. That is why people who seek job security or guarantees are often the people with less abundance in their life. One of the reasons the 90/10 rule of money holds true is because most people spend their lives seeking more security instead of seeking more financial skills. The more financial skills you have the more abundance you will have in your life.” It was these financial skills that gave rich dad the power to begin acquiring some of the most valuable real estate in Hawaii even though he had very little money. These same financial skills give people the power to take an opportunity and turn it into millions of dollars. Most people can see opportunities, they just cannot turn that opportunity into money and that is why they often seek even more security. Rich dad also said, “The more a person seeks security, the less they can see of the opportunities that abound. They see only one side of the coin and never see the other side. That is why the more they seek security the less opportunity they see on the flip side of the coin. As the great baseball player Yogi Bera once said, ‘Strike out just 7 out of 10 times and you’re in the Hall of Fame.’” In other words, if he came to bat one thousand times in his baseball career, and if he could strike out only 700 times, he would be in the Hall of Fame. After reading Yogi Bera’s quote, rich dad said, “Most people are so security conscious that they live their entire lives avoiding striking out just once.” Mental Attitude Quiz I came from a family that saw the world as a world of not enough money. My personal challenge was to repeatedly remind myself that another kind of world existed and that I needed to keep an open mind to see a world of both possibilities for me. So the mental attitude questions are: 1. Can you see that two different worlds of money can exist? A world of not enough money and a world of too much money. Yes___ No ____ 2. If you currently live in a world of not enough money, are you willing to see the possibility of you living in a world of too much money? Yes___ No _____ Chapter 5 Investor Lesson #3: Why Investing Is Confusing One day, I was waiting in rich dad’s office and he was speaking on the phone. He was saying things such as, “So you’re long today?” and “If the prime drops, what will that do to the spread?” and “OK, OK, OK, now I understand why you’re buying an option straddle to cover that position” and “You’re going to short that stock? Why not use a put option instead of a short?” After rich dad put his phone down, I said, “I have no idea what you were talking about. Investing seems so confusing.” Rich dad smiled and said, “What I was talking about was not really investing.” “It wasn’t investing? Then what was it? It sounded like what investors on TV and in the movies sound like.” Rich dad smiled and laughed, saying, “First of all, investing means different things to different people. That is why it seems so confusing. What most people call investing is not really investing. People are all talking about different things yet they often think they are talking about the same thing.” “What?” I said, screwing up my face. “People are talking about different things yet thinking they are talking about the same thing?” Again rich dad laughed. The lesson had begun. Investing Means Different Things to Different People As rich dad began the lesson that day, he repeatedly stressed that main point. Investing means different things to different people. The following are some of the highlights of this important lesson: Different People Invest in Different Things 1. Rich dad explained some of the differences in value. a. Some people invest in large families. A large extended family is a way to ensure care for the parents in their old age. b. People invest in a good education, job security, and benefits. The individual and his or her marketable skills become the assets. c. Some people invest in external assets. In America, about 45% of the population owns shares in companies. This number is growing as people realize that job security and lifetime employment are less and less guaranteed. There Are Many Different Investment Products 2. Here is a sample of some of the different types of investments: a. Stocks, bonds, mutual funds, real estate, insurance, commodities, savings, collectibles, precious metals, hedge funds, etc. b. Each one of these groups can then be broken down into different subgroups. Let’s take stocks, for example. Stocks can be subdivided into: 1. 2. 3. 4. 5. 6. 7. 8. 9. Common stock Preferred stock Stocks with warrants Small cap stock Blue chip stock Convertible stock Technical stock Industrial stock And on and on and on Real estate can be subdivided into: 1. 2. 3. 4. Single family Commercial office Commercial retail Multi-family 5. 6. 7. 8. 9. Warehouse Industrial Raw land Raw land to the curb And on and on and on Mutual funds can be subdivided into: 1. 2. 3. 4. 5. 6. 7. 8. 9. Index fund Aggressive growth fund Sector fund Income fund Closed end fund Balanced fund Municipal bond fund Country fund And on and on and on Insurance can be subdivided into: 1. 2. 3. 4. 5. 6. Whole, Term, Variable Life Universal, Variable Universal Blended (whole and term in one policy) First, second, or last to die Used for Funding Buy-Sell Agreement Used for Executive Bonus and Defferred Compensation 7. Used for Funding Estate taxes 8. Used for Non Qualified retirement benefits 9. And on and on and on c. There are many different investment products, each designed to do something different. That is another reason why the subject of investing is so confusing. There Are Different Investment Procedures 3. Rich dad used the word “procedure” to describe the technique, method, or formula for buying, selling, trading, or holding these investment products. The following are some of the different types of investment procedures: 1. Buy, hold, and pray (long) 2. Buy and sell (trade) 3. 4. 5. 6. 7. Sell then buy (short) Option buying and selling (trade) Dollar cost averaging (long) Brokering (trade no position) Saving (collecting) 4. Many investors are classified by their procedures and their products. For example: 1. I am a stock trader 2. I speculate in real estate. 3. I collect rare coins. 4. I trade commodity future options. 5. I am a day trader. 6. I believe in money in the bank. These are all examples of different types of investors, their product specialties, and their investing procedure. All of this adds to the confusion on the subject of investing because under the banner of investing there are people who are really: a. b. c. d. e. f. Gamblers Speculators Traders Savers Dreamers Losers Many of these individuals call themselves investors and, technically they are, which is why the subject of investing is even more confusing. No One Is an Expert at Everything “Investing means different things to different people.” Rich dad also said, “There is no one person who can possibly be an expert at the entire subject. There are many different investment products and many different investment procedures.” Everyone Has a Bias A person who is good at stocks will say, “Stocks are your best investment.” A person who loves real estate will say, “Real estate is the basis of all wealth.” Someone who hates gold will say, “Gold is an obsolete commodity.” Then you add procedure bias and you really become confused. Some people say “Diversify. Don’t put all your eggs in one basket,” and still others such as Warren Buffet, America’s greatest investor, says, “Don’t diversify. Put all your eggs in one basket and watch that basket closely.” All of this personal bias from so-called experts adds to the confusion that shrouds the subject of investing. Same Market, Different Directions Adding to the confusion is that everyone has a different opinion on the direction of the market and the future of the world. If you watch the financial news stations, they will have one so-called expert who says, “The market is over-heated. It will crash in the next six weeks.” Ten minutes later, another expert will come on and say, “The market is set to go up even further. There will be no crash.” Late to the Party A friend of mine recently asked, “Every time I hear of a hot stock, by the time I buy it, the stock is heading down. So I buy at the top because it’s the hot popular stock and then a day later it starts heading down. Why am I always late to the party?” Another complaint I often hear is: “The stock drops in price so I sell it, and the next day it goes up. Why does that happen?” I call this the “late to the party” phenomenon or the “you sold too early” phenomenon. The problem with investing in something because it’s popular or rated as the #1 fund for the past two years is that real investors have already made their money in that investment. They were in it early and got out at the top. For me, nothing is more frustrating than to hear someone say, “I bought it at $2 a share and it’s now at $35 a share.” Such stories or hot tips do me no good and only frustrate me. That is why today, when I hear such tales of instant wealth and fast money in the market, I just walk away and choose not to listen . . . because such stories are not really stories about investing. This Is Why Investing Is Confusing Rich dad often said, “Investing is confusing because it is a very large subject. If you look around you, you’ll see that people have invested in many different things. Look at your appliances. Those are all products from companies that people invested in. You receive your electricity from a utility company that people invest in. Once you understand that, then look at your car, the gas, the tires, seat belts, windshield wipers, spark plugs, the roads, the stripes on the road, your soft drinks, the furniture in your house, the shopping center your favorite store is in, the office buildings, the bank, the hotels, the airplane overhead, the carpet in the airport, etc. All of these things are there because someone invested in the business or building that delivers you the things that make life civilized. That is what investing really is all about.” Rich dad often ended his lessons on investing with this statement: “Investing is such a confusing subject for most people because what most people call investing is not really investing.” In the next chapter, rich dad guides me into reducing the confusion and into what investing really is. Mental Attitude Quiz Investing is a vast subject with many different people having as many different opinions: 1. Do you realize that investing means different things to different people? Yes_____ No_____ 2. Do you realize that no one person can know all there is to know about the subject of investing? Yes_____ No_____ 3. Do you realize that one person may say an investment is good and another person may say the same investment is bad, and realize both could have valid points? Yes_____ No_____ 4. Are you willing to keep an open mind to the subject of investing and listen to different points of view on the subject? Yes_____ No_____ 5. Are you now aware that focusing on specific products and procedures may not necessarily be investing? Yes_____ No_____ 6. Do you realize that an investment product that is good for one person may not be good for you? Yes_____ No_____ Chapter 6 Investor Lesson #4: Investing Is a Plan, Not a Product or Procedure I am often asked questions like, “I have $10,000 to invest. What do you recommend I invest in?” And my standard reply is, “Do you have a plan?” A few months ago, I was on a radio station in San Francisco. The program was on investing and was hosted by a very popular local stockbroker. A call came in from a listener wanting some investment advice. “I am 42 years old, I have a good job, but I have no money. My mother has a house with a lot of equity in it. Her home is worth about $800,000 and she owes only $100,000 on it. She said she would let me borrow some of the equity out so I could begin investing. What do you think I should invest in? Should it be stocks or real estate?” Again my reply was, “Do you have a plan?” “I don’t need a plan,” was the reply. “I just want you to tell me what to invest in. I want to know if you think the real estate market is better or the stock market.” “I know that is what you want to know . . . but do you have a plan?” I again asked as politely as possible. “I told you I don’t need a plan,” said the caller. “I told you my mother will give me the money. So I have money. That’s why I don’t need a plan. I’m ready to invest. I just want to know which market you think is better, the stock market or the real estate market. I also want to know how much of my mom’s money I should spend on my own