The Amateur Financier

Ah, Robert Kiyosaki.  You make some excellent points, but also raise more than a few questions in my mind.  Your first book in the Rich Dad(R) series, Rich Dad, Poor Dad, was one of the first personal finance books that I ever encountered, both setting me on the path to understanding my finances and making me think I needed a second opinion.  The second book, Rich Dad’s Cashflow Quadrant, seems to be an improvement, but was still a far cry from the detailed advice in most other personal finance books.

Which brings us to the third book in the series, Rich Dad’s Guide to Investing.  There’s certainly plenty of ground that could be covered in a book that claims to tell you what the Rich invest in.  Does it end the initial trilogy with a bang, or a whimper?  We’ll have to read on to find out.

Summary

The book starts with an introduction that brings up the 90/10 rule of money; 90% of the wealth is controlled by 10% of the people in the world.  He also explains his belief that in order to invest, you need to know about business.  The first phase of the book covers the mental preparation to be an investors.  The first chapter covers a story when Kiyosaki returned home from Vietnam, how he wanted to invest with his ‘Rich Dad’, but was unable because he didn’t meet the financial qualifications to do so.  He noted that he had much work to do to become an investor, starting with mentally preparing himself to be an investor.

The second chapter covers preparing a foundation of wealth.  It sets up the preparation that needs to go into the mental aspect of creating wealth.  The next sixteen chapters cover individual lessons an investor needs to learn.  These lessons are as follows:

1. There are three choices for reasons to invest: to be secure, to be comfortable, or to be rich.
2. You can see a world with too much money, if you shift away from thinking of money as scarce.
3. Investing is confusing to most people because there are many different goals, different products, and different techniques.
4. Investing is a plan, not a particular product; getting attached to a particular investing procedure will only limit your options.
5. You can plan to be rich or poor, and your financial plan will determine where you end up.
6. Getting Rich is Automatic, if you have a good plan and stick to it.
7. Finding the right plan takes some deep thought, careful consideration, and a good financial team.
8. Deciding now what you’ll be when you grow up, and keep expanding the goals for your life.
9. Whether you want to be secure, comfortable, or rich, your plan will have its own costs and expenses.
10. Investing isn’t risky, if you can invest from the inside.
11. Which side of the table you sit on, whether you are a business owner or an employee, will determine your level of success.
12. There are several basic rules of investing.  Knowing the type of income you’re working toward (earned, portfolio, or passive), converting your earned income into passive and portfolio, knowing that you (the investor) are the asset or liability, and having the ability to evaluate risk and reward.
13. You can reduce the risk level of your investments by increasing your financial literacy, such as learning to read income statements.
14. Some basics of financial literacy include focusing on cash flow, know the government rules (and that they can change), and that it takes two financial statements to see the whole picture (one from the payer, one from the payee).
15. Mistakes can lead to good results, if you learn from them.
16. There are many ways to become rich, all of which have a price.

Chapter nineteen again covers the 90/10 riddle, how you can acquire money making assets without spending your own money?  The answer, as expressed in chapter twenty, is to turn great ideas into profits by creating assets.  This is also the first chapter of Phase Two, which asks what type of investor you want to become.

Chapter twenty-one introduces the five categories of investors according to Rich Dad, which are covered in the next several chapters.  The first is the accredited investor, someone who has $200,000 in income ($300,000 for a couple) or a net worth of $1,000,000, and is accredited by the SEC, but may not have any skills or talent at investing.  The next is the qualified investor, who understands fundamental and technical investing, has education, and is generally confident.  Then, there’s the sophisticated investor, who has knowledge of the different laws and knows about the different types of legal entities.  The inside investor is someone who owns at least 10% of the outstanding shares of a company.  Finally, there’s the ultimate investor, someone who starts a company, takes it public, and sells shares in it.

Chapter twenty-seven is about how to get rich quick, by taking advantage of the tax laws in the B quadrant.  Then is the chapter on keeping your day job and becoming rich, by starting a business part time, emphasizing the need for business skills over needing a great product.  Finally in this section, chapter twenty-nine stresses the importance of simply getting started with your business plan.

Phase Three is about building a strong business.  First, there are answers to the question of why you should build a business.  Chapter thirty suggests that three possible reasons are to generate excess cash flow, to sell it, or to take it public.

Chapter thirty-one introduces the B-I Triangle (that’s business and investing triangle, by the way).  The three parts that make up the surrounding area are the mission, team, and leadership, the three elements needed to make functional business.  The next several chapters cover the five elements in the middle of the triangle: cash flow management, communication management, systems management, legal management, and product management.  Each one (save product management) provides a list of the many sub-elements of that aspect of creating a business.

Phase Four asks, who is a sophisticated investor?  Chapter thirty-seven covers how the sophisticated investor thinks, including the ten investor controls.  Some of these controls include controls over yourself, over income/expense and asset/liability ratios, over taxes, and over the entity, timing and characteristics of your company.  Chapter thirty-seven includes information on analyzing investments, including information on financial ratios and performing due diligence on companies in which you invest.

The ultimate investor makes a reappearance in chapter thirty-nine, with Kiyosaki sharing how he took his company public, and passes on a story of his friend Peter taking a company public on the Canadian Stock exchange.  Chapter forty provides some reasons why you would want to take a company public, as well as possible sources of funding before and after going public.  Chapter forty-one ends this section with a discussion of how rich people can go bankrupt, pointing out a few problems they might face, from not knowing how to handle their wealth to not having the experience needed to preserve it.

Phase five is about giving it back, and has only one chapter, entitled ‘Are You Ready to Give Back’?  The whole thing is the story of Kiyosaki’s encounter with a friend who was convinced that rich people cause problems in the world, but was convinced of how generous the wealthy people can be when it comes to giving money back to charity by the design of Kiyosaki’s game.  The book concludes that the world is changing, presenting a great deal more opportunity to those who are prepared.

Pros

-Interesting Perspective: It’s not the normal view of investing, but that’s not necessarily a bad thing.  If you’re interested in creating a business as a way of bringing some other income, it’s certainly an interesting book to get some perspective on what is involved.

-Encouraging: As always, Kiyosaki is nothing if not encouraging to his readers.  If you are interested in starting a business of your own, reading through this book could be a good way to find inspiration and get some generally good (if overly generalized) advice.

Cons

-Second Verse, Same as the First: If you read the first two Rich Dad books, you’ve already got a pretty good idea of what material is in the first phase of this book (which makes up the first third of the book).  The material is still fairly sound, if broadly drawn, but it continues Kiyosaki’s trend of repeating himself in his follow-up books.

-Not Really an Investment Book…But Not Really About Starting a Business, Either: In the minds of most people, starting a business and taking it public (the main ‘investment’ covered in this book) is not actually an investment, at all.  But the book doesn’t really provide instructions on how to start and grow a business, either.   There’s not even much instruction on how to take your company public, arguably the major thrust of the book.

-General Lack of Detail: Continuing on the last point, there’s not much helpful detail in this book, at all.  This is most apparent in the B-I Triangle related chapters; there are lists of things that need to be done to create and build your company, ranging from setting up daily office operations to handling legal issues, but no instruction provided on how to do any of it.  If you need something more than a checklist (and if you’re hoping to start a company you can go public with, you will), you’re going to need another book, or more likely, several.

Overall

If you’re looking for a bit of encouragement to start your own business, with plenty of folksy stories along the way, Rich Dad’s Guide to Investing might be a good book for you.  However, it’s far from the only book you’re going to need, and frankly, you can do without this book, since there’s little in the way of solid information to be found.  Just skip it, unless you’re a huge Kiyosaki fan and have to have all his works.

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