Wisdom of Rich Dad

Discover how Robert Kiyosaki’s financial board game, Cashflow 101, can show you the ways of the rich and the habits of the poor and middle-class.  Click the image below to launch the Cashflow Game Animation.  (It opens another new window). 

This is an excellent article from Robert Kiyosaki in Yahoo Finance column back in July 2006.  He explained in a simple way what most of us, as average amatuer investors, are doing (eg, stock watching all day) and what we should do or shouldn’t do if we are to become a true investor.

============ 

by Robert Kiyosaki 

Warren Buffett is famous for talking about the “intrinsic value” of stocks. But while many people parrot this phrase, few know what it really means.

The good news is that once you understand intrinsic value, you may better understand why some investors make more money than others. You might also realize that you can find intrinsic value in investments other than stocks, such as real estate.

Follow the Bouncing Ball

When the average investor thinks about making money, he or she usually thinks about buying low and selling high. For example, an investor buys a stock for $10 and sells it when (and if) it reaches $20.

This leads many investors to check their stock prices immediately first thing every morning; their day gets off to a good start if the price has gone up, and a bad start if the price has gone down. Many of these investors become addicted to watching their stocks rise and fall throughout the day.

Warren Buffett doesn’t do this, and neither do I. While the price of an asset is important, it’s not something we watch on a daily basis. Buffett owns businesses rather than stocks, and pays close attention to price only when he buys one. After that, he isn’t really concerned if the share price goes up or down, nor does he care if the stock market is open or closed.

In very simple terms, Buffett looks for well-managed businesses that grow more valuable over time; consequently, he often refers to a business’s value “compounding,” or accelerating in value. This is its intrinsic value, and being aware of it is one of the differences between an amateur investor and a professional one.

A Real Estate Example

Intrinsic value may be easier to understand from a real estate perspective.

When I buy a piece of property, I, like Buffett, am only concerned about price at the time of the purchase, because price determines returns. For the long term, I focus more on the following:

Income (cash flow): This is often called positive cash flow after all expenses are paid, including my mortgage payment and taxes.

Depreciation (phantom cash flow): This appears as an expense when it’s really income that comes from a tax break. This confuses many people who are new to investing in real estate; it’s essentially income you don’t see.

Amortization: This is income because your tenant is paying down your loan. Paying the mortgage on your personal residence is an expense, but when your tenant pays your loan down, it’s cash flow.

Appreciation: This is really inflation that appears as appreciation. If your rental income goes up, you as an investor can refinance and borrow your appreciation out as tax-free cash, and have your tenant pay for the amortization of the new loan amount. In other words, it can be tax-free cash flow.
Together, these components amount to the intrinsic value of a sound real estate investment, purchased at the right price and well managed. They provide me with what I invest for — increased value and cash flow.

Investing vs. Speculating

Investors who buy a property to sell, often known as flippers, invest primarily for capital gains. This is often taxed at higher rates if they spend their gains instead of reinvesting their money; to me, these people are speculators, not investors.

True investors aim for cash flow and increased value. Warren Buffett doesn’t like to sell because selling shares triggers a tax, and a tax reduces his wealth. Those who know Buffett’s formula know that he wants to compound his returns, not share them with the government.

Keeping an Eye on Intrinsic Value

You become a better investor by training your brain to “see” what your eyes can’t — the real value (or lack of value) in any investment, regardless of whether it’s a stock, bond, mutual fund, business, or real estate. This is its intrinsic value.

This highly simplified diagram of a financial statement better illustrates what I mean:

These components amount to the intrinsic value a professional real estate investor looks for in a property — and most amateur investors miss.

When Warren Buffett mentions the intrinsic value of a company, he is referring to many of the same things. The vocabulary he uses is sometimes different, but the concept is the same.

Amateur Investing Yields Average Returns

The average stock investor refers to P/E ratios the same way that the average real estate investor refers to cap rates. While these are important indicators, they’re hardly a measure of intrinsic value — and, as I mentioned, professional investors are looking for value, not price.

To sum up, the average investor only knows one way to make money: buying low and selling high. A professional investor would rather buy low, realize gains from other arenas, and let the asset grow forever.

 

I want to build up my wealth by making my money work harder for me.  That was my thought after reading the “Rich Dad, Poor Dad” by Robert Kiyosaki.  I want to start investing with what I can afford, even though it is not a lot.  I started buying into stocks, with the limit knowledge I have.  I made some and at the same time, I lost some.  Then, one of my peers asked me one fine day – what is your strategy in my investment?

huh?  Strategy?  Buy low, sell high?  Well, he sent me some information on what could be strategies which I can learn and hopefully apply to my investments. 

What I have been doing is really to attempt to “time” the market.  Going in and exiting at appropriate time but trying to “time” the market has often proved to be unsuccessful for investors.  Investing for the long term has proven to be a more fruitful investing strategy.  There are different methods of long term investing which can provide investors with a cushion should they purchase a stock at an unfavorable price.

These are dollar cost averaging, constant dollar, and constant ratio.

Probably the simplest of the three methods is dollar cost averaging.  This method consists of investing a constant dollar amount over a long period of time at fixed intervals (weekly, monthly, annually, etc.). 

As an example, a person might want to invest one thousand dollars every month. The idea is to keep putting forth money without exception.  This method works most effectively when the investor owns a portfolio consisting of five or six stocks.  An investor should only consider this method if he has a steady supply of income and he is willing to invest for a long period of time.

The constant dollar method is one where the amount of money invested is kept at a constant level.  For instance, an investor has 50,000 dollars invested, after a certain period of time (set by the investor), the value of the portfolio will be set to 50,000 dollars again.

For example, if the portfolio increases in value to 59,000 dollars and the time set by the investor has passed, then the investor would withdraw the 9,000 dollars.  Conversely, if the value of the portfolio decreases to 42,000 dollars and the time set by the investor has passed, then the investor will have to deposit 8,000 dollars.

This system allows the investor to take advantage of market fluctuations. A well diversified portfolio should be used with this method.

The constant ratio method requires investors to maintain a constant 50/50 ratio in the portfolio between stocks and bonds. As stock prices rise bonds are bought and stocks are sold. As stock prices decline, bonds are sold and stocks are purchased. This method, historically, is the weakest.

These methods are just some valid forms of investing for the long term. They can be applied to stocks and mutual funds. They provide investors with a nicely structured investing strategy.

Understand them and learn to see if these can be of help to your investing plan. 

Robert Kiyosaki was taught by his “Rich Dad” about money matters at a young age and that laid a solid foundation for his finanical literacy which brought about his wealth.

Would you as a parent do the same and educate your child about financial knowledge while they are still young?  

Some people say, “Timmy’s so young. I want him to enjoy being happy and innocent.  Money is a worry for grown-ups, not kids.”  I say, “We’re raising a whole generation with ‘sucker’ stamped on their foreheads because we’re not teaching them.”

Your job as a parent is not just to keep your child happy. You’re raising a future grown-up who needs to be able to deal with grown-up matters. If you teach little Timmy how to handle money responsibly, then grown-up Timmy will be better equipped for a richer life.  Look at the statistics below:

• 19% of Americans between the ages of 18 and 24 declared bankruptcy in 2001. (USA Today, 2001)
• The fastest growing group of bankruptcy filers are those people who are 25 years of age or younger. (Senate Committee on Banking, Housing and Urban Affairs, 2002)
• Over 80% of undergraduates have at least one credit card and nearly 50% of college graduates carry 4 or more credit cards. According to the Department of Education, the average balance carried by these students is more than $3,000. (Senator Chris Dodd, CT)

These statisics show that many children aren’t being taught how to handle money.  Young people are making mistakes with zeros at the end of them. These mistakes often take years to overcome. Teach your children how to handle money while they are young, and they won’t make mistakes later on in life.

Teach them young, teach them now!

 

 

Here’s a video of Robert Kiyosaki introducing the Rich Dad Events and Seminars in 2007.

Robert Kiyosaki is cutting back on the number of live seminars he does this year as he focuses on building his business.  One of the seminar event this year will be the Entreprenuers Class and Robert Kiyosaki explained in this video, that the content of the class is how to build a good business. 

Having read “Rich Dad, Poor Dad” and following the advise of Robert Kiyosaki to let money work hard for you, I decided to invest some money in the stock market for some capital gain.  I brought into a stock which my colleague recommended as it is doing well recently.

Well, guess what, after 2 weeks, the price of the stock came stumbling!  My colleague advised me to sell it off, and stop the loss but I did not heed his advice.  I hate to sell it off at a loss, so I am holding on to it, in hope that it will rebound one day!

I know, I know…going by the rational rule of thumb, I should set a loss stop and sell it off once it hit the loss stop level, but…  I guess I am having my investing driven by my emotion which is actually a bad thing.

How do I shift myself away from emotional investing?  I guess I have to be more discipline, came up with a game plan and stick to the game plan closely.

Besides that, I also found some pointers from Jason Zweig, MONEY Magazine senior writer, on how to have better control of brain and emotions when investing.

Why do so many of us make such bad investing decisions even when we know better? A new breed of scientists dubbed “neuroeconomists” are starting to come up with some answers.

Blending neuroscience, economics and psychology, these researchers are delving into how our brains work when we set out to make money in the markets. The more they learn, the clearer it becomes that we’re wired to chase the big score — over and over again.

The good news is, this research also makes it clear that we can conquer our own worst impulses. These five strategies can help.

Control what’s controllable

Whether your investments beat the market is largely outside your control. But some things are entirely in your hands: cutting your tax and brokerage bills by trading less often, and keeping your expenses down by relying on index funds or lower-cost managed funds like those in the MONEY 65.

Kick the habit

If watching financial TV or clicking on investing Web sites gives you the itch to get rich quick, turn off the sound or use the “history” window on your Web browser to count how many times you visit the site each day. Just like a smoker trying to quit, you may need tricks like these to help bolster your self-control.

Chill out

“It’s important to realize,” says Stanford University neuroeconomist Brian Knutson, “that the magnitude of a long-shot reward is going to drive your behavior far more than the probabilities, which are minuscule.”

Making an investing decision while you’re inflamed by the hope of a big gain is a terrible idea. Instead, reconsider after your anticipation circuits have cooled off. If you like a stock, try waiting two weeks without ever checking its price. Then study the company’s financial reports to estimate the per-share value of the business. Afterward, you can check the current share price—and invest only if the business value is higher.

Separate your savings

If you still can’t resist “hot” investments, isolate them in a “mad money” account, funded with no more than 10 percent of your capital. Never put more than that at risk.

Plan ahead

A tip can itself be enough to inflame your anticipation circuits and overpower the analytical part of your brain. To reduce the odds that emotion will dominate your decisions, handcuff yourself in advance.

By dollar-cost averaging (automatically investing a fixed amount every month into a mutual fund or brokerage account), you can be sure most of your money goes to work on autopilot, where the heat of the moment can’t melt your resolve.