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Rich Dad, Poor Dad

Page history last edited by Byron Woodson II 10 years, 7 months ago

Rich Dad, Poor Dad

Robert Kiyosaki

 

The format of these notes is a little different because I knew going in that I had some serious doubts about the advice offered by the book. As it turns out, I think that most of the basic principles are sound; the danger lies in the investment strategies that he advocates.

 

1. The rich don’t work for money

     a. Life pushes you around. Some let it happen. Others push back.

     b. The pushees end up in the rat race, driven by fear and desire. Fear of being without money, and the desire for nice things.

          i. Money cannot banish fear and desire

          ii. You must master your emotions. Use your emotions to think, don’t think with your emotions.

     c. Kiyosaki and his friend Mike opened a comic book library using the remaindered comics and averaged $8.50 per week (after paying $1 per week to Mike’s sister to act as librarian).

2. Financial literacy

     a. Rich people acquire assets. The poor and middle class acquire liabilities, but think they are assets. (Editor’s note: This is one of Kiyosaki’s more controversial statements. His definition of an asset is very different than the accounting definition of an asset. He would be better off substituting the terms “cash generator” for asset and “cash consumer” for liability.

          i. A dividend-paying stock is a cash generator. A pleasure boat, while technically an asset, is most definitely a cash consumer.

     b. Assets put money in your pocket. Liabilities take money out of your pocket.

          i. For example, a house may be an asset, yet also be a cash consumer. A big house with a big mortgage and big property taxes will consume your cash, with no guarantee that capital appreciation will pay you back.

          ii. And, because your capital is tied up in your home, you cannot deploy it to good use elsewhere.

     c. To become rich, spend your life buying assets. To become poor or middle class, buy liabilities.

     d. More money simply accelerates a person’s natural money cycle. If your pattern is to spend everything that you make, making more money will likely simply lead to more spending.

     e. The Japanese parable of the sword, the jewel, and the mirror

          i. The sword is the power of weapons

          ii. The jewel is the power of money

          iii. The mirror is the power of self-knowledge, which is the most treasured of the three.

     f. In summary, the rich focus on acquiring cash generators that produce income, while minimizing cash consumers and other expenses.

          i. After a certain point, the loop reinforces itself. Cash generating investments throw off enough free cash flow to pay all expenses and can be reinvested to generate more cash. This is analogous to the crossover point in “Your Money or Your Life.” Kiyosaki calls the state of investment income exceeding expenses being “wealthy.”

          ii. Kiyosaki: “Keep your expenses low, reduce your liabilities, and diligently build a base of solid assets.”

3. Mind your own business

     a. Your profession is not your business, because you work for someone else.

     b. You business revolves around your asset column. Focus on acquiring assets, not increasing income.

     c. Investments work 24 hours per day, and can work for generations.

     d. Rich people buy luxuries last (since they are cash consumers) with income generated from investments, the poor and middle class buy them first.

 

It is at this point that Kiyosaki deviates from what I consider financial prudence. He belittle mutual funds (which, based on the efficient markets theory, are one of the best investments you can make) in favor of real-estate and startup investments.

 

4. Taxes and corporations

     a. Kiyosaki advocates using corporations to shelter income.

          i. Technically this is incorrect, because corporations are also taxed, so corporate income ends up being taxed twice. Kiyosaki is wrong in saying that incorporating lowers taxes because corporate tax rates are lower. First of all, they are generally higher. Second, you have to pay personal taxes on corporate income that you receive.

          ii. However, as every business person knows, having a corporation also allows you to pay “expenses” using pretax dollars. Kiyosaki says that this means that the rich earn, spend, then pay taxes, while others earn, pay taxes, and then spend. In this regard, he is at least partially correct.

          iii. Furthermore, businesses should be conducted using a separate legal entity for liability purposes.

5. The rich invent money.

     a. That is, the rich create businesses using their mind.

          i. Kiyosaki gives the example of purchasing a house at a fire sale price using borrowed money, and then reselling immediately for triple the price.

          ii. The problem with advocating this approach is that markets are generally efficient. Any strategy that relies on exploiting market inefficiencies tends to disappear over time, especially if you write a bestseller about them!

          iii. He does offer some good advice—that markets boom and crash, and that those who remain calm when everyone else is panicking can make a lot of money. But it is unlikely that the real estate investing enthusiasts who buy Kiyosaki’s books take this to heart—otherwise they wouldn’t be buying housing in its current overvalued state.

          iv. Kiyosaki discusses the difference between retail investors who buy packaged investments like mutual funds and investors who assemble deals themselves.

               1. Find opportunities others have missed.

               2. Learn how to raise money (never let a lack of money prevent a deal if you can use OPM)

               3. Hire smart people.

6. Work to learn, don’t work for money

     a. Select a job for what it can teach you, because the goal is not to find a good job, it is to acquire assets.

     b. If you become a specialist, you probably need a union to protect you, because your skills won’t transfer to other jobs.

7. Overcoming Obstacles

     a. Overcome the fear of losing money.

          i. If you have risk and worry, start early to take advantage of compound interest

          ii. Winning means being unafraid to lose. Winners take their failures, learn from them, and turn them into rallying cries. “I always tried to turn every disaster into an opportunity.” –John D. Rockefeller.

          iii. Here is where his advice turns scary. “Put a lot of eggs in a few baskets.”

     b. Overcome cynicism

          i. Cynics criticize, winners analyze. Critics are blinded, which people who analyze can see what others do not.

          ii. Colonel Sanders was turned down 1,009 times before someone bought his recipe for fried chicken.

     c. Overcome laziness

          i. People are too lazy to manage their finances. They avoid it by staying busy.

          ii. Instead of saying “I can’t afford it,” say, “What can I do (and how can I do it) to afford it.”

     d. Overcome bad habits.

          i. Pay yourself first, then your creditors.

1. Editor’s note: Like an LBO firm that uses debt to inject financial discipline, this practice increases financial discipline and generates creativity.

8. 10 steps to get started

     a. You need deep emotional reasons and purpose—don’t wants and wants that matter to you—to provide motivation and inspiration.

     b. Choose to be rich. Invest in yourself and try to learn.

     c. Choose your friends carefully so that you can learn from them, and make a conscious effort to learn from them.

     d. Master a formula and then learn a new one.

     e. Pay yourself first.

     f. Pay your brokers well so they’ll give you good advice (a bit controversial—as various stories can attest, brokers are not looking out for your best interest).

     g. Be an Indian giver—that is, minimize the payback period on investments.

     h. Assets buy luxuries. Use the desire for good things to drive you to generate assets to generate income that will pay for your luxuries.

     i. Find heroes to emulate and learn from.

     j. Teach and you shall receive.

 

If I wanted to summarize the good parts of Kiyosaki’s advice, it is that you should minimize expenses, avoid buying things that consume cash, and try to invest as much as possible in cash-generating assets. I think it is also good advice to seek to build businesses and create value, rather than simply working for others, and to use one’s creativity to achieve one’s goals.

 

However, I find Kiyosaki’s advocacy of high-risk investments and real estate speculation frightening. I also think his denigration of mutual funds and portfolio diversification is doing his readers a terrible disservice.

 

For a more detailed critique of Kiyosaki’s book, I highly recommend John T. Reed’s Web site. John is a Harvard MBA and real estate investor who takes the time to painstakingly debunk Kiyosaki’s book and claims, using publicly available information, including Kiyosaki’s military records.

 

http://www.johntreed.com/Kiyosaki.html

 

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