This month’s financial book review is on Rich Dad’s Guide To Investing: What The Rich Invest In, That the Poor and Middle Class Do Not. To first understand the context, this book is the third in Kiyosaki’s personal money trilogy. The first book is Rich Dad, Poor Dad and the second is Cashflow Quadrant.
To sum up, Rich Dad, Poor Dad was self-published in 1997 as a memoir-style finance novel about a boy growing up with two mentors – his biological father ie. Poor Dad and his friend Mike’s father ie. Rich Dad. Poor Dad had a PhD and believed that the key to wealth was doing well at school and getting a higher education, which would lead to a good job as a well-paid employee. He believed that owning a home was one’s greatest asset, and that if you were loyal and worked hard then the company you worked for and/or the government would look after you in retirement. Rich Dad had a grade 8 education, and he believed that a residential home belonged in the liability column, not the asset column of a net worth statement. He also believed money should work hard for you rather than you trading your time for money. He taught Kiyosaki that building financial literacy, creating businesses, and investing the business income into passive and portfolio income were the keys to building wealth. Robert shares his struggles with the two competing paradigms as he applied them to his life. This book went on to become a New York Times best-seller and one of the most widely-read personal finance books of all time.
Cashflow Quadrant builds on the concepts presented in Rich Dad, Poor Dad, and outlines in detail the four ‘income quadrants’ available to us. 1) Employee and 2) Self-Employed represented the Left Side of the quadrant, and were the paths that 90% of the population who control 10% of the world’s wealth were trained for in school and ultimately chose as their path to income creation. These paths represent (perceived) Security. Quadrant 3) Business Owner and 4) Investor represent the Right Side of the quadrant, and are where the remaining 10% of the population that control 90% of the world’s wealth choose to focus. He states that the Quadrant 3) and 4) mindset and skill sets are not taught in school and that these paths represent Freedom. A very interesting read that continues to challenge the status quo, while also providing some good examples of how one can move from one quadrant to another and learn the business and investing skills of quadrants 3 and 4, while maintaining the security of quadrants 1 and 2.
Okay, onto Rich Dad’s Guide to Investing! The story begins with Kiyosaki as a young military pilot returning to his home in Hawaii from service in Vietnam to find his Poor Dad, having fallen out of favor in his cushy government job, recently unemployed. At age 52, Poor Dad is now looking for work and just starting to rebuild his financial life. Rich Dad has been building up his business assets through passive and portfolio income and is incredibly wealthy.
Having followed the more traditional Poor Dad path until this point, Kiyosaki feels he is at a crossroads and seriously contemplates what he wants from life. He decides he will become rich and that he will not re-enlist in the military. Rich Dad agrees to resume his role as Kiyosaki’s financial mentor.
As in Rich Dad, Poor Dad, and Cashflow Quadrant, Kiyosaki’s writing is very personal, simple and easy to follow (if somewhat repetitive in places). I enjoyed all three of his books for this reason – many personal finance books are dry, jargon and acronym heavy, and often seem to require a base financial or investing knowledge that most everyday people don’t have, in order to understand the concepts. Reading this book is very empowering, as we realize that all of us have the power to become rich, if we take the action to follow his suggestions and use the tools suggested.
As Robert ponders which quadrant he should focus on in order to become rich, Rich Dad bluntly tells Robert “You don’t have the expertise that employers are willing to pay the big money for, so you won’t make enough money like this to invest with. Besides, you’re sloppy, you get bored easily, you have a short attention span, you tend to argue and you don’t follow instructions well. Your chances of success as an Employee are low. Regarding becoming Self-Employed that’s not a good fit either – this is for smart people, including those that become lawyers, doctors and accountants. You’re bright, but not that smart and you were never much for school. That leaves the Business Owner quadrant. This is perfect for you. Since you lack any special talent or expertise, your chances for attaining great wealth will be here.” We are being told here that if Kiyosaki can do this, any of us can.
This book is full of some great observations, good common sense advice, and excellent insight into wealth building. The best advice Kiyosaki gives in the book is the importance of creating and following a financial plan, (although he doesn’t expand much on HOW to build one and recommends finding a good financial advisor/planner). Kiyosaki says you should make 3 plans and follow each one until you have reached your goal – 1) a plan to be financially secure 2) a plan to be financially comfortable, and 3) a plan to be rich.
Kiyosaki writes: “There is nothing more high risk than a person who does not have those two basic plans [one for becoming financially secure and one for becoming financially comfortable], and who is focused only on becoming rich. While a few make it, most don’t…”
Kiyosaki says that many people are so concerned with security and perceived risk that they never have a plan to build financial comfort, let alone significant wealth. People don’t stick to boring, but workable, plans. People want riches fast without investing any time and effort to building their skills or increasing their financial literacy. Kiyosaki advises setting realistic goals based upon your level of financial knowledge. Then, as you gain experience, add more ambitious financial goals.
The crux of his advice about investing and creating passive income streams revolves around creating a business that earns income, and then using that income to buy assets that create both passive and portfolio income. Kiyosaki writes: “In order to be a good investor, you first need to be good at business.” So, Kiyosaki recommends starting a part-time business. Even if your part-time business doesn’t make you rich, you will learn much about business, and those lessons will be valuable. Why study business? Kiyosaki points out that “roughly 80% of the very rich became rich through building a business.”
The other reason he advocates learning about business is because essentially all investments are investments in businesses, whether they are start up, spin off, publicly traded or privately held. Once you fully understand the components of what makes a business successful, you will be better equipped to make wise investments based on your critical assessment of how others are running their businesses that they are seeking your capital to support. This knowledge is what mitigates your risk, increases your control and results in building your wealth. You will also able to create investments/businesses that other people will want to buy. He devotes several chapters to the necessary components of how to build a solid business, and does a good job of describing the structure needed.
What I liked as well were his descriptions of the different types of investors, and he devotes a chapter to outlining how one can become that type. They are:
The Accredited Investor – def. One that has over $1Million in net worth. This is the minimum net threshold to invest in many private companies in the US, as per the Securities Exchange Commission (SEC). (Note: In Canada, one needs a minimum of $1Million in net worth, OR have earnings of at least $200K per year per year, or $300K with a spouse to be considered an Accredited Investor. However, different provinces have different rules about whether one must be Accredited to participate in private investments). Many Accredited Investors, while they may have money, have zero knowledge about investing or are financially illiterate, often having earned their money as an employee or self-employed professional.
The Qualified Investor – def. One that has money available to invest and has some knowledge about investing. With regard to the stock market, a Qualified Investor would know how to read and interpret financial statements, as well as know the difference between technical and fundamental investing. The difference between an average investor who lives in fear of the stock market crashing, is that a Qualified Investor has the skills to profit whether the market goes up or down.
The Sophisticated Investor – def. The Sophisticated Investor knows as much as the Qualified Investor, and has also studied the advantages available through the legal system. S/he has familiarity with tax law, corporate law and securities law and is then able to use the advantages of E-T-C: Entity (business structure), Timing (knowing when and how to pay, defer or avoid taxes) and Characteristic (knowing which of the 3 types of income – earned, passive or portfolio – make the most sense given the Entity and the Timing). Usually the poor and middle class focus on earned income, whereas the rich focus on passive and portfolio income. A Sophisticated Investor has learned how to turn earned income into passive or portfolio income.
The Inside Investor – def. One that is on the inside of the investment and has some degree of management control. The book was written for people who want to be investors on the inside rather than the outside – and the most important distinction is that you don’t need a lot of income or net worth to be an inside investor – legally. The SEC defines an “insider” as anyone who has information about a company that has not been made publicly available. Kiyosaki’s use of the word “insider” defines investors who have management control over the operations of a business, as they have control over the direction of the company. In addition to building a business of your own, you can become an inside investor through buying a controlling interest in an existing company, be it public traded or privately owned.
The Ultimate Investor – def. Is a person such as Bill Gates or Warren Buffet, who builds companies that other investors want to invest in and take the companies public. While is not likely that many investors will ever build a Microsoft or a Berkshire Hathaway, we all have the possibility of building a smaller business and becoming wealthy by selling it (or parts of it) privately or publicly.
I found the definitions and explanations of what it takes to become each type of investor interesting, especially as it underscores that there are many paths to wealth, depending on one’s interests, skills and abilities. There is also an interesting chart that highlights the difference in knowledge and perception of risk from the perspective of an “average investor” vs. a “sophisticated investor” on page 217 – what is low risk to most average investors ie. Having a secure job, diversifying, avoiding making mistakes, only relying on one’s own knowledge and experience, expecting good financial advice to be free, trusting others to make financial decisions for them etc., would be considered high risk for a sophisticated investor.
A better title for this book might have been Rich Dad’s Guide To Entrepreneurship and Investing, because of the solid discussion on building a business. Kiyosaki says to be successful in business, you should learn: communication skills, leadership, team-building skills, tax laws, corporate law, and securities law. He also emphasizes the importance of a solid mission that the company must be working toward that reaches beyond simply making the owner(s) rich. He suggests learning to read financial statements. Most crucial is overcoming fear of failure and learning sales skills. Public speaking is important, because to lead you must be able to speak effectively. Kiyosaki says he wasn’t a natural speaker, but because he was committed to working on his plan to be rich as an Inside Investor, he worked on his speaking skills. He writes, “Successful people find their weaknesses and make them strengths.”
In a nutshell, this book is another Kiyosaki great read! He continues to buck the status quo, and encourages people to adopt common sense, creativity and collaboration in the name of taking more control over their financial intelligence and literacy. The language is frank, easy-to-understand and simple to follow. He is a big believer in experiential education (ie. Learning by doing, or taking action) and working with others as mentors, which I personally agree with as one of the best ways to learn.
As well, its important to be aware that while Robert Kiyosaki has written some great books and provided well-meaning resources and companies designed to help people build their financial literacy, some affiliates and others licensing the Rich Dad name have caused some negative controversy as of late. There is also some skepticism and criticism regarding the authenticity of his Rich Dad and whether the writing is fictional or not. As with anything, it’s important to employ some skepticism and critical thinking when it comes to following ANY advice or direction from others – and Kiyosaki himself states this over and over again in his book(s). However, do be cautious when considering attending any “How to Get Rich” seminars which post ads that you may see around your town or in the newspaper – to see a recent Marketplace critique and expose, please click here.
In conclusion, the most important lesson discussed in this book for those that are starting out – is the importance of creating a solid, sober financial plan for each ‘level’ of your financial life and to follow that plan – as Kiyosaki states, first we need a plan to create security. Only then can we create a plan to be comfortable. Finally, and if we are willing to continue the hard work necessary, we then create and follow the plan to be rich. There are no shortcuts, and all levels require perseverance, hard work and a commitment to following the plans. (Stay tuned – Share the Wealth is increasing our capacity to provide you with more financial planning resources this summer).
And if you haven’t already played Kiyosaki’s famous Cashflow game, this may be a great start to or continuation of your experiential financial education. It is like “Monopoly on steroids” and very useful in learning to create a basic financial statement, recognizing good and not-so-good deals, creating joint ventures with others, and creating passive income streams. It also helps to shift one’s mindset from a Quadrant 1 and 2 mindset to the Quadrant 3 and 4 mindset.
You can play the game online for free, but this does require registering your name and email online (which means you will get emails advertising fee-based seminars and “Rich Dad Coaching”) – just something to be aware of ahead of time.
You can purchase the game yourself through the Rich Dad Store for $195.00 or you can often find them as low as $75.00 (plus taxes and shipping) on either Amazon or EBay, but as an owner of these games myself, I think the best (and most frugal!) way to learn is by joining in with other like minded people at CashFlow meet-ups and clubs happening around the continent. They are often free or have a nominal drop-in fee (usually to cover the cost of renting a room). Check here to find a registered Rich Dad club in your area.
There are also other informal groups that meet regularly to play the game – google “Cashflow Game and (your town/city)” to find one. For anyone living in the Victoria area, we’d love to play the game with you! We are happy to host up to 6 players in our home near UVIC on the first Wednesday of each month – email us if you’re interested at info@sharethewealth.ca. The next 101 game will be Wednesday, April 7th at 6:00pm (the game takes about 3 hours to play) – please give us at least 24 hours notice. As well, depending on interest, we can host the more advanced 202 game as well – let us know and we’ll schedule a time to play!
Thanks for reading and we welcome your comments!
As many of you faithful readers know, I’m a big believer in creating passive income in order to free up time to have more choices in life – to work because you love it, rather than to just make ends meet. When I first heard about the “4 Hour Workweek – Escape 9-5, Live Anywhere and Join the New Rich” I knew I had to read it – the only thing standing in my way was having to study for and then pass an Exempt Market Products exam in order to keep up with changes in the private investments industry in Canada – very interesting stuff, by the way, the course content is focused on the intricacies of hedge funds, flow through shares, limited partnerships, real estate investment trusts and principal protected notes (look for more blogs on these topics this Fall!) But I digress – having passed my exam I proceeded to devour this book in less than one week, and am already inspired to implement many of the very practical suggestions he offers.
Posted by jaynsteele 
Sonja has a PhD in Positive Psychology and has written the first book based on the results of her empirical investigations on the “Science of Happiness”. She is a research scientist, not a clinician, life coach or self-help guru and her research studies have revealed how people can practically achieve a greater sense of happiness in their lives. She cites numerous studies to support her claims, conclusions and recommendations, and the book written in language that is friendly, conversational and practical.
