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Do you want to be rich? If the answer is yes then you need to learn how to invest as the rich do. Robert Kiyosaki's Rich Dad's Guide to Investing is a great place to start your journey. You will learn the different types of investors and which you can be with no money. Finally, you will learn how to analyze and build a business. All investments are businesses so in order to be a successful investor you must be a good business person.
I know you are just as busy as I am so I've organized the information into three sections; The outcome and actions to achieve it, A condensed Session by Session summary, and finally my full summary.
Outcome: How to become a rich investor even if you have no money.
List of Action Items
- Make the mental choice to gain the education and experience required to be rich following a personal automatic boring investing plan.
- Solve the 90 / 10 Riddle by filling your asset column by creating assets instead of buying assets with money.
- Determine the type of investor you work to be; accredited, qualified, sophisticated, inside, or ultimate.
- Keep a day job that teaches you long-term skills and while you build a business part-time as an inside investor.
- The B-I Triangle, a system of systems that can create an asset from an idea, consist of the mission, team, leadership, and then build from cash flow, communications, systems, legal, and product.
- Become a sophisticated investor, an inside investor who benefits from each of the ten investor controls.
- Learn to read financial statements.
- Become an ultimate investor by taking a company public which requires the determination to learn, an experienced mentor to learn from, and the willingness to work for free for a long time especially in the beginning.
- Make a plan for having too much money.
- Be charitable, not only because it is good but it also increases good expenses and reduces income.
Condensed Session by Session Summary
Phase one of rich dad's guide from having no money to investing with a lot of money is to prepare your mind to become a rich investor. This is a simple yet very important phase for anyone who wants to invest with confidence. Instead of asking what should I invest in, make a mental choice to gain education and experience to be rich, poor, or middle class. The rich pour a foundation of wealth by not working for money, they know how to have money work for them. They never say they can't afford it, instead, they ask themselves "how can I afford it?". Investing is only confusing because it means different things for different people involving many different products and procedures. To be successful, you must have a personal automatic boring investing plan not attached to a particular vehicle. A huge part of your investing education is learning financial vocabulary and its correct definitions. The outcome of your plan should stay the same but improving your education and experience will improve your plan for security, comfort, and be rich. Each plan has a price measured in terms of the most precious asset; time. To minimize the risk of investing you must gain control of yourself, your plan, and your investment. Always know what kind of income you are working for; Earned, portfolio, or passive. The goal is to convert earned income into a portfolio or passive income. The investor is really the asset if they understand the internal strengths and weaknesses of the investment through financial literacy. The relationship between the income statement and the balance sheet is the basics of financial literacy. When you come to the boundaries of what you know it's time to take some risk and manage mistakes ( The 18 Investor Lessons ).
The 90 / 10 rule is that 10 percent of people of any population have 90 of the money. The 90 / 10 Riddle is to fill your asset column by creating assets instead of buying assets with money. It is better to work years at creating assets than to spend your life working hard for money to create someone else's asset. A rich investor also knows how to keep the money that the assets make and have it acquire even more assets as well as the luxuries of life ( The 90/10 Riddle ).
Investing is not risky, not being in control is risky. Rich Dad categorized 10 investor controls that are important to all investors; Control over yourself, income/expense ratios and asset/liability ratios, management of the investment, taxes, when you buy and when you sell, brokerage transactions, ETC (entity, timing, and characteristics), terms and conditions of the agreements, access to information, and philanthropy. Each category of investor, accredited, qualified, sophisticated, inside, and ultimate, has a different level of investor control. The accredited Investor earns a lot of money and/or has a high net worth. The qualified investor, usually an accredited investor who has also invested in financial education, knows both fundamental and technical investing. The sophisticated investor knows as much as the qualified investor but also understands investing and the law. The inside investor's goal is to build successful business users to create and build assets. The ultimate investor builds giant companies that millions of people want to invest in. Rich Dad recommends starting your journey as an inside investor. Even with very little money and experience you can start small and work toward gaining education, experience, and excess cash. Learning the fundamentals of building a business will help you analyze investments as an Investor ( The Categories of Investors ).
You can become rich slowly by starting small, learning tax advantages, and becoming a sophisticated investor. You will be able to get ahead faster by paying last and only on taxable income. You can keep your day job and still become rich, in most cases you need to eat and put a roof over your head while you build a business part-time. Rule number one in becoming an entrepreneur is to never take a job for the money, take a job only for the long-term skills you will learn such as sales ability. The entrepreneurial spirit will drive you to build a business because of the challenge, because it's exciting, and because it will require everything you've got to make it successful ( How to Get Rich Slowly ).
The B-I Triangle is a system of systems that can create an asset from an idea. The outer systems are mission, team, leadership, and then build from cash flow, communications, systems, legal, and product. The mission is the base because it provides the fire, drive, and desire to begin, survive and grow. Business and investing require a team that can include multiple specialized professionals. More businesses fail from poor leadership, unable to bring out the best in people, than any outside threats.
Financial literacy and cash flow management allow you to read the number that tells you the fact-based story of a business. Communication, including the sales and marketing of a business, requires you the know what motivates and excites people both externally and internally with a focused, unified, and convincing message. Sales are done one-on-one but marketing is done via a system. A true business system, much like a car, includes interoperating systems that do not depend on only one specific person to operate. Legal management, including legal professionals, will help you protect your time, money, and intangible assets. The company's product is the least important aspect of the B-I Triangle but is at the top of the triangle because it is the expression of the business's mission ( The B-I Triangle ).
A sophisticated investor is an investor who understands and benefits from each of the ten investor controls. A sophisticated investor knows that there are multiple right answers, that the best learning comes from making mistakes, and that financial literacy is essential to be successful. Control over income/expense ratios and asset/liability ratios is developed through financial literacy of the three cash-flow patterns of the poor, middle class, and the rich. The sophisticated investor owns enough of an interest in the investment to control the decision-making process. The sophisticated investor has learned enough about the tax laws to benefit from minimized taxes paid, tax deferrals, and pay for a number of expenditures with pre-tax dollars. The sophisticated investor can make money in an upmarket as well as in a down market and has the ability to delay gratification. Sophisticated investors with control over brokerage transactions carefully track the performance of their investments and direct their broker to buy or sell. Sophisticated investors focus on legally converting as much ordinary earned income into passive and portfolio income as possible. The sophisticated investor is in control of the terms and conditions of agreements when he or she is on the inside of the investment. As an inside investor, the sophisticated investor has control over access to information understanding the legal requirements of insiders imposed by the SEC in the United States. The sophisticated investor recognizes the social responsibility that comes with wealth including charitable giving, creating jobs, and expanding the economy ( How a Sophisticated Investor Thinks ).
If you learn to read financial statements, you can see what is happening within any company or investment. A sophisticated investor uses ratios in evaluating an investment in conjunction with an analysis of the overall business and industry. Real Estate should generate positive cash flow and due diligence completed. A sophisticated investor recognizes good debt, good expenses, and good liabilities. Saving and investing are similar and both can work but while saving could make you comfortable investing will make you much richer ( Analyzing Investments ).
Most people join the ranks of the ultra-rich the old-fashion way, they built companies and sold shares in their company to the public. Taking a company public requires the determination to learn, an experienced mentor to learn from, and the willingness to work for free for a long time especially in the beginning ( The Ultimate Investor ).
Newly rich people suddenly go broke because they use their old money habits to handle new money problems. If you want to remain rich, you must have a plan for too much money. Rich people go bankrupt because instead of using their expenses to make them rich, they use their expenses to make them poor ( Why do Rich People Go Bankrupt? ).
You can't help people unless they truly want to help themselves. Poverty is caused by a lack of education but it is tough to teach anyone who is not interested in learning. Being charitable is a part of being rich because it increases good expenses and reduces income ( Giving It Back ).
There are many investment books written on how to buy assets but this book is dedicated to learning how to create assets that buy assets. In the information age we currently live in, it has never been more possible to become wealthy. No longer does it take money to make money, it just takes an idea. Once you have mastered the guidelines found in the B-I Triangle, you can virtually take nothing and turn it into an asset. Those who do not risk failing will ultimately fail.
Your past success means nothing, the rules are always changing. The most important investment is in your education and your experience. You can choose to live in a world of not enough money or a world of too much money. That choice is up to you. For additional and more detailed information on Robert Kiyosaki's Rich Dad's Guide to Investing continue reading below.
The 18 Investor Lessons
I asked Rich Dad "What advice would you give to the average investor?", he reply was "Don't be average".
The only reason to build a business is to use the business to buy the assets of the rich.
When choosing between rich or happy, choose both
"Human judgment is far more limited than we think" - David Faust, Author of 'The Limits of Scientific Reasoning'
Investor Lesson #1: "What should I invest in?" The answer is found in Rich Dad's Three E's; Education, Experience, and Excess cash. There are no risky investments, only risky investors. If you have the education to know how to determine good deals from bad deals then you minimize your risk. Making mistakes is part of the education and experience; it may even mean you will lose money. The way you will know that you have enough education and experience is that you will have excess cash.
Rich Dad taught how to have excess cash, becoming a sophisticated investor, in five phases; Being mentally prepared to be an investor, decide the type of investor you want to be, how to build a strong business, who is a sophisticated investor, and giving it back.
Investor Lesson #2: Pouring a Foundation of Wealth. Rich dad started poured his foundation of wealth through building businesses and buying real estate and working on a plan. The reason you build businesses is to buy assets because buying assets outside of a business is riskier and has fewer tax benefits. The rich don't work for money, they know how to have money work for them.
Investor Lesson #3: The Choice. Investing starts with a mental choice to be rich, poor, or middle class. It is a very personal decision that will change everything in your life. The choice you make will force you to prioritize financial security, comfort, or wealth. If financial security is most important to you, then you will seek a job. If you choose to be rich then you are able to remain uncomfortable until your reach your goal.
Investor Lesson #4: What kind of world do you see. There are only two types of money problems; too much money or not enough money. Whichever one is true for you, will be how you see the world. The more security you need the more scarcity and competition in your life. Rich people never say they can't afford it, instead, they ask themselves "how can I afford it?". Until you see the world differently, you miss opportunities directly in front of you.
Investor Lesson #5: Why investing is confusing. Investing means different things to different people using many different investment products and procedures. For this reason, no one can be an expert on the entire subject of investing; everyone develops a bias. What most people call investing is not really investing. Under the banner of investing there are people who are really gamblers, speculators, traders, savers, dreamers, and losers. Adding to the confusion everyone has different opinions on the direction of the market and the future of the world. One person may say the investment is good and another person may say it is bad and they both may have valid points.
Investor Lesson #6: Investing is a plan; not a product or procedure. The answer I give to "I have $10,000 to invest, what should I invest in?" is do you have a plan? It doesn't matter if you have money or which market you are thinking of investing in. Investing is a very personal plan. Investment products are often called investment vehicles because they satisfy many different needs and the point is to get from point A to Point B. Investing is like planning all the legs of a trip factoring in the time you may have, the reasons you are going, and different vehicles you may need. Don't get attached to the investment vehicle rather focus on your plan.
Investor Lesson #7: Are you planning to be rich, or are you planning to be poor?. If you want to see a person's past, present, and future, just listen to his or her words. the idea that it takes money to make money is one of the worst ideas there is, especially if a person wants to make more money. It does not take money to make money; you must simply increase your financial vocabulary. In order to be comfortable in their profession, A lawyer must learn the vocabulary of law, a medical doctor must learn the vocabulary of medicine, and an investor must learn the vocabulary of finance. Furthermore, nothing is more destructive to a person's financial stability than using the wrong financial definition; such as calling a liability an asset. A lot of people are planning to be poor when they state "When I retire, my income and my needs will go down".
Investor Lesson #8: Getting rich is automatic if you have a good plan and stick to it. Nine out of ten investors fail to make money. Investing is not an exciting process where there is a lot of drama, it is a dull, boring, almost mechanical process making of formulas and strategies the almost guaranteed to get you rich. Rich dad found his formula from playing monopoly, if the formula is too complex then it is not worth following. Keeping it simple is the best rule for investing.
Investor Lesson #9: How can you find the plan that is right for you?. You can find the right plan for you by taking time to think about your life up to this point, figure out what you want from life, don't talk to anyone else about what you want until you are more than sure, find the best financial advisors, preferable those who have already done what you are trying to do, for you to begin developing a written financial plan, and keep that plan up-to-date as your progress. Your plan should stay the same but it should be improved upon with life experiences. Set realistic goals and then improve upon them or add more as your education and experience increase. Investing is a team sport, continue to build your financial team with may include a banker, accountant, lawyer, broker, bookkeeper, insurance agent, and successful mentor. Your plan shouldn't change but you must allow it to change you.
Investor Lesson #10: Decide now what you want to be when you grow up. The importance of the three financial core value choices, to be secure, comfortable, or rich, should not be taken lightly. If you want to be rich then you need a plan to be secure, comfortable, and rich. If you want to be comfortable you need a written lifetime plan to be secure and comfortable. Most people never become rich because they don't understand what it really means to be financially secure or comfortable. If your plan is to be rich then writing a plan to be secure and another to be comfortable will be difficult, boring, and you may not want to follow it but you should. In making the plans you will uncover what is financially possible for your life.
Investor Lesson #11: Each plan has a price. The difference between the plan to be rich and the plan to be comfortable or secure is the price. The price is not measured in terms of money but rather in time; the more precious asset. The more you think of time as precious and that it has a price, the richer you will become; think of buying time rather than saving time. Many people work hard at trying to save money but they waste a lot of time. Saving is important and it is possible to become rich by saving but the price is really measured in time. If you become rich by being cheap then you will eventually have a lot of money but you will still be cheap. Most people want to get rich but are not willing to invest the time in basic skills and experience and they end up losing both time and money. There is no such thing as 'risk-free' but certainty comes from education and experience; both of which cost time.
Investor Lesson #12: Why investing isn't risky. People say investing is risky for three main reasons; they have not been trained to be investors, they lack control of themselves, their plan, and their investments, and they invest from the outside rather from the inside. It is important to note that there is legal inside investing and illegal inside investing, this book is talking about legal inside investing. If you want to be rich you have to get closer to the inside than even the professionals to whom most people entrust their money. To do that you must invest a lot more time than the average investor on business and investments. Investing is a very personal subject so decide if you are willing to follow rich dad's investment plan or find one that would work better for you.
Investor Lesson #13: On which side of the table do you want to sit?. Working hard and saving money is important if you want to be secure and comfortable but if you want to be rich, saving money will probably not get you there. People who work hard and save money often pay more than their fair share in taxes, think investing is risky, and avoid learning something new on the other side of the coin. Investing isn't risky if you learn how to operate from all four quadrants; meaning on the business and investor side of the Cashflow Quadrant and the employee and self-employed side. The most important quadrant is the investor. You can live any life you want in any quadrant if you master the investor quadrant first.
Investor Lesson #14: Basic rules of investing. You are not in competition with anyone else, focus on improving your experience and education. Once your two plans for security and comfort are in place, then you can experiment and learn more exotic techniques utilizing different investment vehicles. Basic rule number one is to always know what kind of income you are working for; ordinary earned income, portfolio income, or passive income. Basic rule number two is to convert ordinary earned income into portfolio income or passive income as efficiently as possible. Basic rule number three is to keep your ordinary earned income secure by purchasing security you hope converts your earned income into passive or portfolio income. Note that securities are not necessarily assets. An asset puts money into your pocket and a liability takes money from your pocket. Basic rule number four is that it is the investor who is really the asset or the liability. Investing is risky but it is really the investor who is risky. Basic rule number five is that a true investor is prepared for whatever happens; a non-investor tries to predict what and when things will happen. If you are prepared, there is a deal of a lifetime being presented to you every day of your life. Basic rule number six is if you are prepared, which means you have education and experience, and you find a good deal, the money will find you or you will find the money. If a good deal does not attract the money is it because the person controlling the deal did not attract the cash. Basic rule number seven is the ability to evaluate risk and reward. At this level, the investor should have the three E's; education, experience, excess cash. He knows the difference between good losses and bad losses, good debt and bad debt, good expenses and bad expenses, and can explain the investment in less than two minutes in a way it could be understood by a 10-year-old. Investing is a subject you can learn the basics of for the rest of your life.
Investor Lesson #15: Reduce risk through financial literacy. The way to become an investor who makes a lot of money with very little risk and then hangs on to the money is to keep things simple and understand the basics. If you are not willing to investing your time, then leave your investment capital with people who are following the investment plan of your choice. The number one control you must have to be an investor is control over yourself and your emotions. Gresham's law states that bad money will always drive out good money. So when the government started printing more and more money making it worthless, the rich focus on turning that worthless money into assets. Unfortunately the poor and middle class buy things that have even less value than their money; turning cash into trash. You can reduce the risk of investing by learning to read financial statements, understanding how to run a business, and becoming financially literate. A financial statement allows you to see the internal strengths and weaknesses of the investment. You can find the best investment opportunity from understanding accounting, the tax code, business law, and corporate law.
Investor Lesson #16: Financial literacy made simple. The relationship between the income statement and the balance sheet is the basics of financial literacy; you can't truly understand one without the other. The most important words in business and investing are cash flow; an investor must be keenly aware of the subtle shifts in cash flow. Literacy lesson number one is to use the direction of cash flow that determines if something is an asset or a liability at the moment. Just because you list something in the asset column, doesn't make it an asset. Assets are proven by the income statement showing more income than expenses from the security. Don't count your chickens before they hatch. Literacy lesson number two is it takes at least two financial statements to see the entire picture. Your expense is someone else's income. The more you read financial statements, annual reports, and prospectuses, the more your financial intelligence will increase.
Investor Lesson #17: The magic of mistakes. Unlike the world of academics, mistakes are opportunities to learn something new. When you come to the boundaries of what you know it's time to make some mistakes. To be successful in the real world of business, you have to be school smart as well as street smart. In schools, you are given the lesson first, but on the street, you're given the mistake first, and then it's up to you to find the lesson if you ever find it. Since most people have not been taught how to make mistakes and learn from them, they either avoid mistakes altogether, which is a bigger mistake, or they make a mistake but fail to find the lesson from the mistake. People may be doing all the right things, but the problem is that they are avoiding the wrong things. Instead of avoiding risks and mistakes, learn to manage them.
Investor Lesson #18: What is the price of becoming rich. You can become rich by marrying someone for his or her money, being a crook, through inheritance, winning the lottery, being outstanding in one field or another, being greedy, being cheap, or being financially smart. If you have the education and experience, you will always have plenty of money. The price of being financially free requires time and dedication to gain the education, experience, and excess cash. You can become rich by being generous, and you can only serve so many people being in the E and S quadrant. If you build large operating systems in the B and I quadrants, you can serve as many people as you want; doing so you will become richer beyond your dreams. To be a rich investor, you must have a plan, be focused, and play to win. In addition to the three E's rich dad states, you need the five D's; Dream, Dedication, Drive, Data, and Dollars. It Is focus on the first three D's that ultimately gains you the data and dollars you need to become very, very rich.
Phase One, preparing your mind to become a rich investor, is the most important phase. Money is just an idea and if you think money is hard to get and you'll never be rich, then it will be true for you. The rich, even before they have money, see a world full of opportunity and too much money. If you believe you can achieve, work hard to do so, then you will.
The 90/10 Riddle
Rich Dad agreed with the 80 /20 rule (principle of least effort) wherein 80% of our success comes from 20% of our effort, in all areas except money. When it comes to money, Rich believed in the 90 / 10 rule, meaning that 10 percent of people of any population have 90 of the money.
"Imagination is more important than knowledge" - Einstein.
"Thinking is the hardest work there is. That is why so few people engage in it." Henry Ford.
The 90 / 10 Riddle is to fill your asset column by creating assets instead of buying assets with money. Successful entrepreneurs do this by building businesses, music artists do it by creating music, inventors do it by inventing something, painters paint paintings, and authors write books. The business, music, invention, painting, and books are only the part of the asset you can see, the real asset was the thought process behind it is the real asset. Exercising your brain with this riddle on a regular basis will become your most powerful asset. Rich dad's first lesson was that the rich don't work for money. It is better to work years at creating assets than to spend your life working hard for money to create someone else's asset. Buying assets is recommended for your secure and comfortable plans but if you have dreams of becoming a very rich investor you must be willing to create your assets rather than buy someone else's assets. A rich investor also knows how to keep the money that the assets make and have it acquire even more assets as well as the luxuries of life.
For those of you obsessed with finding money to start your business, this is an important lesson for you. Rich Dad believed that if you focus on filling the asset column without spending money then you will be able to fund any business idea you have. Of course, Rich Dad would recommend you have your plans to be secure and comfortable in place before making more speculative investments.
The Categories of Investors
The poor and the middle class want the pride of ownership, but the rich do not want to own anything but want to control everything.
Rich Dad categorized 10 investor controls that are important to all investors; Control over yourself, income/expense ratios and asset/liability ratios, management of the investment, taxes,
when you buy and when you sell, brokerage transactions, ETC (entity, timing, and characteristics), terms and conditions of the agreements, access to information, and philanthropy. Investing is not risky, not being in control is risky.
The accredited Investor earns a lot of money and/or has a high net worth. There are many employees and self-employed people who qualify based on their income alone and choose to turn their money over to competent financial advisors; which is a good choice if you choose not to invest your time in financial education. Having enough money to invest in the investments of the rich does not necessarily mean the person knows anything about investing. The accredited investor generally has excess cash but none of the ten investor controls, education, or experience.
The qualified investor, usually an accredited investor who has also invested in financial education, knows fundamental and technical investing. This investor would be considered an "outside" investor which generally includes stock traders and analysts who focus on fundamental or technical investing. Fundamental investors reduce risk as he or she seeks to value and growth by looking at the financials of the company specifically its future earnings potential, the outlook for the economy as a whole as well as the specific industry, and the direction of interest rates. A well-trained technical investor invests in the emotions of the market, invests with insurance from catastrophic loss, and the supply & demand of the stock offering. While both types of investors invest from the facts, they find their facts from different sources of data. Wealthy qualified investors do not predict the market but are prepared for whichever direction it decides to go. They know getting out is more important than getting in. The qualified investor has control over yourself, income/expense ratios, and asset/liability ratios, when you buy and when you sell. They possess the education and may have experience and excess cash.
The sophisticated investor knows as much as the qualified investor but also understands investing and the law. This investor typically has all three of rich dad's three E's. He or she utilizes the tax, corporate, and securities laws to maximize earning and protect the underlying capital. If you want to become a successful investor but do not wish to build your own business to do so, your goal should be to become a sophisticated investor. A sophisticated investor is able to use the advantages of E-T-C; entity, timing, and character. Entity means the choice of business structure; if you have a choice. Timing is important because ultimately we all need to pay taxes but the rich control how much and when they have to pay them. The characteristics of income, ordinary earned income, portfolio income, and passive income, are what separates the rich from the middle class. The investor controls of the sophisticated investor are control of yourself, control over income/expense ratios and asset/liability ratios, control over taxes, control over when you buy and when you sell, control over brokerage transactions, and control over the E-T-C. The sophisticated investor possesses all three E's. Lack of management control is the defining difference between a sophisticated investor and an inside investor.
The inside investor creates investments. This investor's goal is to build successful businesses which will be used to create and build assets. A successful inside investor will learn the skills needed to analyze companies for investments from the outside; therefore an inside investor can learn to become a successful sophisticated investor. An important distinction of the inside investor is the aspect of control over management, you don't need to have a lot of income or net worth. Someone with the financial education, but not the financial resources, of an accredited investor, can still become an inside investor. The investor controls possessed by the inside investor is control over yourself, control over income/expense ratios and asset/liability ratios, control over the management of the investment, control over taxes, control over when you buy and when you sell, control over brokerage transactions, control over the E-T-C, control over the terms and conditions of the agreements, control over access to information. The inside investor possesses all of the three E's. The Securities Exchange Act of 1934 made it illegal for anyone who had nonpublic information on a company to profit from that information. I use the word 'insider' to define investors who have management control over the operations and direction of the company.
The ultimate investor becomes the selling shareholder. This investor owns a successful business in which he or she sells ownership interest to the public. These investors build giant companies that millions of people want to invest in. An investor controls possessed by the ultimate investor are control over yourself, control over income/expense ratios and asset/liability ratios, control over the management of the investment, control over taxes, control over when you buy and when you sell, control over brokerage transactions, control over the E-T-C, control over the terms and conditions of the agreements, control over access to information, and control over the redistribution of wealth. The ultimate investor possesses all of the three E's. The advantages of 'going public' are to allow business owners to cash in some of their equity in the business, raise capital, pay off debt, raise net worth, and benefit employees. Some disadvantages to going public are that you are forced to disclose information to the public, the IPO is very expensive, Your focus is diverted from running the operations of the business to meeting the requirements of being a public company, compliance with the IPO, risk losing control of your company, and risk of being sued by your shareholders.
Rich Dad recommends starting your journey as an inside investor. Even with very little money and experience you can start small and work toward gaining education, experience, and excess cash. Learning the fundamentals of building a business will help you analyze investments as an Investor.
Rich dad's son work his way up to becoming a successful investor and was content. Just like him, you must decide what category of investor is best for you. The investor controls are the most important part of success gained through education and experience.
How to Get Rich Slowly
My rich dad became wealthy by first investing as an inside investor. He started small, learned tax advantages, and became a sophisticated investor at an early age. His investment plan was to build businesses that buy assets with pre-tax dollars. He was able to get ahead faster because he was able to pay his taxes last and only on his taxable income. The laws are the same no matter where in the world you are; He who makes the rules gets the gold. Throughout the history of America taxation of the rich moves up to the top of the agenda but the rich have always found a way out of the trap. Instead, the bulk of the country's taxes are forced upon the employee and the self-employed.
You can keep your day job and still become rich, in most cases you need to eat and put a roof over your head while you build a business. Rule number one in becoming an entrepreneur is to never take a job for the money, take a job only for the long-term skills you will learn such as sales ability. Rule number two is that when you evitably need more money, don't look for another job, instead start a part-time business. Remember the world is filled with great ideas for new products, but short of great businesspeople. The real reason for starting a part-time business is to make yourself a great business person with skills in communications, leadership, team-building, tax law, corporate law, and securities law.
If the pain and the fear of losing are too great, then it is best for that investor to invest very conservatively. Yet if you look at the great wealth of this world, it does not come from cautious investors; it comes from the entrepreneurial spirit. You build a business because of the challenge, because it's exciting, and will require everything you've got to make it successful. Don't do it to become an accredited investor, the risk is too high for such a small sum. There is no such thing as a successful poor entrepreneur or a business owner. Successful business owners and investors have more than one financial statement because they have more than one source of income. While money is important, it is not the primary motivating factor for building a business; that can be found in the spirit of the game. The entrepreneurial spirit is the most valuable asset in building a business.
Let go of the get rich quick lie and learn how to get rich slowly and keep it for generations. It takes dedication and hard work but it will be worth it.
The B-I Triangle
There are three reasons to build a business other than to simply create an asset; to provide excess cash flow, to make it valuable enough to sell it, and to take it public.
My rich dad said. "As a business owner, you don't have to be right 51 percent of the time. You need to be right only once." Building a business is the riskest road for most people. But if you can survive and keep improving your skills, your potential for wealth is unlimited.
The personal traits required to be a successful entrepreneur are the vision to see what others cannot see, the courage to act despite tremendous doubt, the creativity to think outside the box, the ability to withstand criticism, and the ability to delay gratification.
"Tetrahedrons, like the pyramids, are the basic building blocks of nature" -Dr. R. Buckminster Fuller
'Don't teach pigs to sing. It wastes your time, and it annoys the pigs'
The B-I Triangle is the guide to taking an idea and creating an asset.
A business needs both a spiritual and business mission to be successful, especially at the beginning. It is the most important aspect of the triangle, which is why it was at the base. When a business gets big and it forgets its mission or the mission it was created for is no longer needed, the business begins to die. Money alone does not provide enough fire, drive, or desire. A mission is hard to see and measure but without a strong one, a business is not likely to survive its first five to ten years.
Business and investing is a team sport. The problem with being an employee and self-employed is that you as an individual play the game against a team. In school, if a child attempts to cooperate at test time then it is called cheating. In the real world of business, every day is test time and owners cooperate at test time. A team could include multiple attorneys, brokers, financial advisors, insurance agents, and bankers each with input on decisions.
Focus on building a big team and it will get you the big liabilities. Understanding the laws can help you afford a professional team because a business pays for professional services before they pay taxes. If your team lacks experience or is only concerned with salaries then the business will be weak. Money follows management in the world of business capital.
Every team needs leadership. More businesses fail from the inside than from the outside. A leader's job is to bring out the best in people, not to be the best person. If you are the smartest person on your business team, your business is in trouble. Volunteering is one of the best ways to gain leadership skills. In most organizations, it is hard to find people who actually want to lead giving you an opportunity to take the lead on projects, accept the feedback, and grow into a great leader. A leader's role is a combination of visionary, cheerleader, and pitbull.
Cash flow management is a fundamental and essential skill if a person truly wants to be successful in the business and investor quadrants. Financial literacy allows you to read the numbers that tell you the story of the business based on facts. Business owners need to know the difference between actual cash flow and phantom cash flow. Good cash-flow managers, of quickly growing companies, review their cash position daily, looking at cash sources and needs for the next week, month, and quarter. Call on your accountant, banker, and personal financial advisors for advice in structuring your cash-management system.
The better at communication you are, the more people you communicate with, the better your cash flow will be. To be good at communication, you first need to be good at human psychology. You need to know what motivates and excites people both externally and internally. If you want to be a B-quadrant person, your first skill is being able to communicate and speak the language of the other three quadrants. Overcome any fears of selling and public speaking with practice, persistence, and training. That thick-skinned mindset is vital for anyone in the B quadrant. Unsuccessful people find their strengths and spend their lives make their strengths stronger, often ignoring their weaknesses, until one day their weaknesses cannot be ignored anymore. Successful people find their weaknesses and make them strengths. If a business has strong and convincing marketing, the sales will come easily. If the business has weak marketing, the company must spend a lot of time, money, and energy gathering sales. The difference between sales and marketing is Sales is what you do in person, one-on-one but marketing is sales done via a system. Whenever and however you are speaking both your passion for your business and your appearance will have a lasting impact on your audience.
A business is a complex system of interoperating systems that are difficult to separate or say is more important than another. For any business to grow, specific individuals must be accountable for each of the systems and a general overall director must be in charge of making sure all the systems operate at their highest capacity. When one system fails all the other systems begin to fail almost simultaneously. I have heard 'the only time a bank loans you money is when you don't need it' but ifs more that a bank will loan you money when you have a stable system that has value and when you can demonstrate that the money will be paid back. A good businessperson can manage multiple systems effectively without becoming part of the system. A true business system is much like a car. The car does not depend upon only one specific person to drive it. Anyone who knows how to drive it can do so. You may want to record your operations in a policies-and-procedures manual revised when you find ways to streamline your operations and improve your profitability.
Poor legal management is one of the most painful lessons entrepreneurs learn. Your intellectual property attorney and your contract attorney are some of your most important advisors because they help protect your most important intangible assets; patents, trademarks, and copyrights. Many a business has been started and has survived by a simple piece of paper; one legal document can be the seed of a worldwide business. Legal issues can surface in almost every facet of a business. Legal fees may seem expensive at first but when you compare them to the cost of legal fees from lost rights or subsequent litigation, it is much less expensive to set out your agreements properly in the beginning. You must also factor in the cost of lost time focusing on legal matters rather than your business.
The company's product, which the customer ultimately buys from the business, is the least important aspect of the B-I Triangle. Most of us can cook a better hamburger than McDonald's, but few of us can build a better business system than McDonald's. Product is at the top of the B-I Triangle because it is the expression of the business's mission.
Once you master the art of building a B-I triangle, through lots of practice, failing, and restarting, you will find that the less you work, the more money you will make and the more valuable what you are building becomes. That is because you build a system that will work without you. Rich Dad called that thinking "solving the B-I Triangle riddle". The three important points of the B-I Triangle are money always management found in a team with a leader, all working towards a common mission and correcting weakness in their systems.
Once you master the art of building a B-I triangle, through lots of practice, failing, and restarting, you will find that the less you work, the more money you will make and the more valuable what you are building becomes. That is because you build a system that will work without you. Rich Dad called that thinking "solving the B-I Triangle riddle". The importance of the B-I Triangle is that money always management found in a team with a leader, all working towards a common mission and correcting weaknesses in their systems.
How a Sophisticated Investor Thinks
Becoming a sophisticated investor is a process of starting small, understanding every component of the B-I Triangle, learning from mistakes, and building bigger and bigger businesses.
"It's making the first million dollars that's difficult. After you've made the first million, the next ten million are easy."
A sophisticated investor is an investor who understands and benefits from each of the ten investor controls. The ten investor controls are control over yourself, income/expense ratios and asset/liability ratios, management of the investment, taxes when you buy and when you sell, brokerage transactions, ETC (entity, timing, and characteristics), terms and conditions of the agreements, access to information, and philanthropy.
The most important determinant of your success as an investor is control over yourself. A sophisticated investor knows that there are multiple right answers, that the best learning comes from making mistakes, and that financial literacy is essential to be successful.
Control over income/expense ratios and asset/liability ratios is developed through financial literacy of the three cash-flow patterns of the poor, middle class, and the rich. The poor spend every penny they make and have no assets. The middle class accumulates more debt as their wage income increase. The rich focus on acquiring or building assets that work for them paying their expenses and liabilities. Sophisticated investors know how to turn personal expenses into legitimate business expenses such as a computer, phone, meals out, medical expenses, tuition, and home costs.
An investor who owns enough of an interest in the investment to have control over the management of investment is an investor involved in the decision-making process and thus can manage the risks.
The sophisticated investor has learned enough about the tax laws to benefit from minimized taxes paid, tax deferrals, and pay for a number of expenditures with pre-tax dollars.
The sophisticated investor with control over when you buy and when you sell can make money in an upmarket as well as in a down market and has the ability to delay gratification.
Sophisticated investors with control over brokerage transactions carefully track the performance of their investments and direct their broker to buy or sell.
Next to control over yourself, the control over the entity timing, and characteristics are the most important control. Sophisticated investors focus on legally converting as much ordinary earned income into passive and portfolio income as possible.
The sophisticated investor is in control of the terms and conditions of agreements when he or she is on the inside of the investment.
As an inside investor, the sophisticated investor has control over access to information understanding the legal requirements of insiders imposed by the SEC in the United States.
The sophisticated investor recognizes the social responsibility that comes with wealth including charitable giving, creating jobs, and expanding the economy.
The point is that sophisticated investors must have control. That control allows the investor to increases his education, experience, and excess cash. You begin now to think like a sophisticated investor you will have an advantage over those so-called investors who lose more money than they earn.
Analyzing Investments
If you learn to read financial statements, you can see what is happening within any company or investment. You can determine how profitable a business is, or how highly leveraged a business is, just by looking at its financial statements and calculating financial ratios. Every sophisticated investor reviewing any financial plan looks at the financial ratios of a company, financial ratios for investing in real estate, natural resources, good debt or bad debt, investing & saving.
A sophisticated investor, who understands the ratio terminology, can use the following ratios in evaluating an investment; gross margin percentage, net operating margin percentage, operating leverage, financial leverage, total leverage, debt-to-equity ratio, quick & current ratios, and return on equity. You should also consider at least three years of these figures in conjunction with an analysis of the overall business and industry.
When it comes to real estate there are two questions; does the property generate a positive cash flow and if yes, have you done your due diligence? The most important financial ratio of a piece of real estate to my rich dad was his cash-on-cash return. Due diligence is the careful evaluation of a potential investment to confirm all material facts.
Many sophisticated investors include investments in the earth's natural resources such as oil, gas, coal, and precious metals because of their limited supply and attraction to other wealth.
A sophisticated investor recognizes good debt, good expenses, and good liabilities.
Saving and investing are similar and both can work but while saving could make you comfortable investing will make you much richer.
The only way to become a sophisticated investor you must read to read financial statements and use them to analyze investments. In fact, the more financial education you have the more you will want to learn because it is clearly the way you can limit your risk and increase profit.
The Ultimate Investor
Most people join the ranks of the ultra-rich the old-fashion way, they built companies and sold shares in their company to the public; they invented their own money legally. The reason 10 percent own 90 percent of the shares is that they are usually the people who are the founding shareholders. Taking a company public requires the determination to learn, an experienced mentor to learn from, and the willingness to work for free in the beginning. The entry requirements of the major stock markets in the United States have made the IPO a difficult process for most businesses.
"Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative and creation, there is one elementary truth, the ignorance of which kills countless dreams and splendid plans: that the moment one definitely commits oneself, then providence moves too.... whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it. Begin it now." - Johann Wolfgang Von Goethe
Rich dad often said, "An individual's reality is the boundary between self-confidence and faith."
Many small-to-medium companies that cannot meet these qualifications look for 'reverse merger' opportunities, which allow them to merge with an existing public company. Through that process, the company can become a publicly-traded company by taking control of the newly combined public company. Before taking a company public your detailed business plan should include an exit strategy. Additional points to consider are who on the team has run a business? how much of the company are you willing to sell? how big is the market? how much market share can you get? who is on your board of directors? does the company own something proprietary? does the company have a great story to tell? and do those involved with the company have passion?. If you want to learn to raise substantial sums of capital you must become familiar with private placement memorandums, venture capitalists, investment bankers, and mezzanine financing.
Remember becoming an ultimate investor is a choice, you can be tremendously wealthy at the sophisticated or even the inside investor level. If you choose to make the choice to become an ultimate investor be prepared to see it through the hard times.
Why do Rich People Go Bankrupt?
Money is just an idea.
People often think if they can make a lot of money then the money problems will be over.
However, newly rich people suddenly go broke because they use their old money habits to handle new money problems. Most millionaires lose three companies before they win big. The possibilities rich people can go bankrupt include having no idea how to handle a lot of money, giving in to the emotional euphoria of new money, lending money to loved ones, discontinuing financial education and experience, the fear of losing increases, and not knowing the difference between good expenses and bad expenses. If you want to remain rich, you must have a plan for too much money. People who do not change their point of view about money in their head will see only one side of the coin. Money is just an idea. Expenses can be an asset or liability, regardless of how much money you make. Rich people go bankrupt because instead of using their expenses to make them rich, they use their expenses to make them poor.
In order to avoid going bankrupt, it is important to focus on expenses. Spend as many dollars, before taxes, as can you can on buying assets. Learning how to spend the money you make is a vital skill in keeping the wealth you make.
Giving It Back
You can't help people unless they truly want to help themselves. Poverty is caused by a lack of education but it is tough to teach anyone who is not interested in learning. Being charitable is a part of being rich because it increases good expenses and reduces income.
Until you can see the other side of the coin, you will believe the rich people are greedy and uncharitable people. Motives aside it is in the best interest of the rich to give back to society.
There are many investment books written on how to buy assets but this book is dedicated to learning how to create assets that buy assets. In the information age we currently live in, it has never been more possible to become wealthy. No longer does it take money to make money, it just takes an idea. Once you have mastered the guidelines found in the B-I Triangle, you can virtually take nothing and turn it into an asset. Those who do not risk failing will ultimately fail. Your past success means nothing, the rules are always changing. The most important investment is in your education and your experience. You can choose to live in a world of not enough money or a world of too much money. That choice is up to you.
Works Cited
Robert Kiyosaki. "Rich Dad's Guide to Investing: What the Rich Invest In That the Poor and Middle Class Do Not!" 2012.