Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!

Rich Dad's Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!
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Published: 4/3/2012
Investing means different things to different people… and there is a huge difference between passive investing and becoming an active, engaged investor. Rich Dad’s Guide to Investing, one of the three core titles in the Rich Dad Series, covers the basic rules of investing, how to reduce your investment risk, how to convert your earned income into passive income… plus Rich Dad’s 10 Investor Controls.

Book Summary - Rich Dad’s Guide to Investing by Robert Kiyosaki

Key Insights

Drawing heavily from the influence of his “rich dad”, a family friend who was highly successful in amassing wealth, author Robert Kiyosaki explains how the decisions made by people who are monetarily prosperous are significantly different from the choices of the poor and middle-class communities. He provides a detailed account of how the ways in which an individual approaches financial decision making directly impact the final result.

Key Points

The Richest 10 Percent

We all know that there’s inequality in the world, but some of us may be less aware of how much of an economic disparity actually exists. The facts are startling: ten percent of the world’s population holds ninety percent of its wealth. This principle remains true even when you separate out various industries, such as athletes, musicians, actors, and investors. In each of these sub-groups, the numbers hold: ten percent holds ninety percent of the capital overall.

So, how does this happen?

For starters, investing is not even an option when you are poor.

Sure, there are legitimate reasons for not letting people who lack funds to make investments that could end up putting them in an even worse position later on. However, these rules also prevent the poor from the possibility of investing successfully and coming out on top.

In order to illustrate some investment ‘rules’, let’s take a look at an example. You may want to invest in a fund that has huge payout potential. However, the opportunity requires an initial investment of 100k. If you are unable to meet this minimum requirement, you lose your chance to reap the possible benefits of this high risk/high reward investment.

Similarly, in order to qualify for certain investment opportunities, you may need your total household earnings to be above a certain threshold.

If you are not wealthy, you are automatically excluded from these opportunities. However, you still have the ability to participate in less risky--but also less profitable--investment opportunities, because there is not likely to be a significant cost upfront.

You may have heard the saying, “the rich get richer.” It is because wealth is a cycle. If you are not rich, you inherently have less ability to access the avenues that could provide additional wealth.

Think Like the Rich

We know that the rich dress differently and act differently, but it is perhaps less obvious to the casual observer that the rich think differently than the rest of us as well.

The rich tend to make assertions like this:

“Get an education, work hard, save money. Then you’ll be fine.”

While this advice is well-intended, it fails to account for the privilege. People in middle to upper-class families are told this sort of thing, while folks in lower-income households are more likely to be told they just need to get a job, whatever it is. Less emphasis is placed on the rest of it.

People who come from lower-income households are less likely to own their businesses at any point in life. And this impacts their capacity for wealth.

Why?

Because business investors face less risk than individual employees. While people rely on savings, pensions, and employment for financial security, businesses often see an increase in share price when they let go of employees. Most of the time, it is a much safer bet to be on the investor’s side of the table.

Financial Literacy

With the exception of the overzealous analyst or accountant, most of us fail to see the excitement in differentiating between an asset and a liability. However, knowing the difference between the two is key in making sound financial decisions. And in many cases, the rich comprehend each term, while the less wealthy are more likely to mix them up.

Asset--Generates positive cash flow

Example: The car you own

Liability--Something you are indebted to

Example: Your mortgage

But assets and liabilities are not the only financial terms you need to know. There are many other critical ones as well, such as debt-to-equity ratio, return on equity, cash-on-cash return, and financial leverage.

Let’s take a look.

The debt-to-equity ratio indicates the proportion of shareholders’ equity and debt that gets used to finance a company’s assets. In order to determine this ratio, you might look at a company’s business loans (and/or other liabilities) and divide that number by their retained earnings. If you had $100,00 in business loans and retained earnings of $20,000 your debt-to-equity ratio would be 5 which indicates a highly leveraged and risky investment.

Financial leverage is using funds provided by creditors and preferred stockholders to buy assets that benefit the standard stockholders.

Consider a scenario where Company A wants to acquire a $100,000 asset. Rather than using debt financing, the company decides to use the equity in doing this, so that it can own the asset in its entirety. If the asset increases in value by 20%, the company will profit $20,000 and the asset value will rise to $120,000.

The debt-to-equity ratio is actually a determinant of financial leverage.

Return on equity is calculated by dividing a company’s net or annual income by the shareholders’ equity. Essentially, in doing this, you are determining the company’s profitability in terms of equity. It is the return on assets with the liabilities subtracted.

A good return on equity is usually one that is between 15 and 20%.

Cash-on-cash return is the ratio of before-tax cash flow to the percentage of cash that is invested. In formulaic terms, this is equal to the annual before-tax cash flow divided by the total cash investment.

Think about a landlord who owns an apartment complex. Each year, he makes $5,000 from his rentals. However, he had to make a down payment of $300,000 in order to initially purchase the space. Over the course of a year (12 months) he makes an income of $60,000 but this is divided by his initial investment of $300,000, which leaves him with a cash-on-cash return of 20%. Not great, because the landlord is only getting back 20% of what he invested, but over time, this value will get higher and higher.

Investor Variety

In order to make successful investments, we must first understand the various types of investors that exist. The word ‘investor’ is often applied to a wide variety of individuals, so we will start by drilling down on the differing roles each type of investor holds. The four key types of investors are qualified, accredited, inside, and sophisticated.

An accredited investor refers to someone who has a high salary and meets the legal requirements for a wide range of investment opportunities.

A qualified investor, on the other hand, is just as financially sound as an accredited investor, but he or she is also financially educated and has the ability to analyze the movement patterns within various markets.

Both the accredited and the qualified investors are outside investors which means that they have very little control over their assets.

The third type of investor, an insider investor, does not buy assets--he or she creates them.

This individual builds their own business and makes it into an asset, using it to generate income or be sold.

Finally, we have the sophisticated investor. This person is an expert in tax and the law and knows how to work both systems to his or her advantage.

Starting a Business

While many of us like the idea of starting a business and ultimately working for ourselves or “being our own boss” as people often say, we typically feel hesitant to take the leap due to concerns about money and time.

So, sometimes we need to get creative.

Take Michael Dell, founder of Dell Computers, for example. Michael was a college student when he decided to start a computer-making business from his dorm room on a part-time basis. Jeff Bezos took a similar approach, beginning at Amazon part-time from a garage before jumping all in. By starting a business as a “side hustle” rather than immediately quitting your day job, you get to test the market for your product without throwing all of your eggs into one basket.

Once you have started your business, several options open up to you. You can reinvest your profits into other assets, you can sell the business, or you can take it public. All are opportunities that you would not have as an employee.

Master the Mission

It might surprise you to know that Bill Gates did not actually invent the software that made him the wealthiest man in the world. Instead, he purchased the software from developers. He was not a skilled inventor so much as a successful entrepreneur.

So, what makes a business successful?

First, you need a mission. Your mission can be to make money or it can be more altruistic in nature. Whatever it is, you must cultivate it and be sure that your products and services always tie back to the ultimate goal.

Second, you need an efficient team. While it is a good feeling to wear multiple hats, we cannot all be experts at every subject. Therefore, it is important that knowledge is spread across a team.

As such, a successful team needs a leader. A leader is someone who brings out the best in other people. As a leader, you should always ask for feedback from those who work for you and be open to finding new ways to adapt and improve.

Communication

While it is necessary to utilize the previously discussed strategies in order to achieve financial success, experts agree that no amount of economic prosperity is possible without one key skill: communication.

And not just any kind of communication. Sales.

For this reason, Kiyosaki suggests that every entrepreneur develop a sales-training program in order to effectively prepare their employees for the full spectrum of potential scenarios.

And, if you don’t know where to start with this, look to those that have done it before. For instance, networking-marketing organizations often have very successful programs.

At the end of the day, you, and any employees you are training, need two key skills to be a successful communicator in the business world: the ability to communicate product value and a lack of fear at the prospect of being rejected.

Navigate both of these areas and you set yourself up for success.

But don’t let this knowledge convince you that physical appearance doesn’t matter. How you present yourself to others matters too. Make sure that you are showing customers the best possible version of you.

An Air of Sophistication

Think back to our earlier discussion on investors. As you may recall, the sophisticated investor is an individual who specializes in taxes and law and is able to use these skills to their advantage.

This person has much more control over both management and corporate structure than the other types of investors and the result ends up being far greater returns.

The sophisticated investor knows how to spread out risk, minimize legal fees and health insurance, and pay lower taxes, all of which ultimately lead to greater gains.

If you are a sophisticated investor, you know how to make your money work for you.

Do you want to work for your money or make it work for you?

The choice is yours.

The Main Take-away

While the road to wealth looks very different depending on who you are and exactly what you set out to achieve, Rich Dad’s Guide to Investing offers a variety of strategies that are universally fundamental in creating monetary growth. These include mastering communication, thinking like the rich, developing financial literacy, establishing an effective mission and leadership model, and targeting your investments based on the type of network you hope to create.

At the end of the day, Kiyosaki urges readers to make a choice: do you want to be comfortable, secure, or rich? It may not be possible to be all three.

About the Author

Robert Kiyosaki was born in Hilo, Hawaii in 1947. After attending both the United States Merchant Marine Academy and the University of Hawaii at Hilo, Kiyosaki went on to become an expert in personal finance, business and investing. Throughout his career, he has authored more than 26 books on these subjects, which have sold a total of more than 41 million copies worldwide.

Kiyosaki is also the founder of Rich Dad Company, which is a private financial education organization that provides information through books and videos.

Kiyosaki currently resides in Phoenix, Arizona with his wife, Kim.

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