Wisdom of Rich Dad

Are you buying rounds at the bar on payday, feeling generous? Everybody wants your money, you know. The government takes its share before you even get it. You can change that.

You are so square. Thinking and doing the same thing over and over again. You are used to it. Let me shed some light. Our workmanship is divided in four categories, according to the author and entrepreneur Robert Kiyosaki of The Cash-Flow Quadrant. It is divided in four boxes.

On the left side is the box named “e” as in employee, and the other is named “s” as in self-employed or small business owner. This side receive earned income, working for money. The right side boxes are “b” as in business owner and “i” as in investor. This side receive cash-flow from a portfolio of income streams. They practically work for free due to future rewards.

How does your financial life look like? You have chosen security. The monthly paycheck always slipping through your fingers. It becomes expenses on your balance sheet. The expenses are food, clothes, telephone, costs for sustenance and so on. Interest from loans is a big one. The next month you are at it again. Playing the same game. The rat-race. It is never going to end.

This is insanity and indicates a low financial intelligence. This can not be safe nor secure! Even a well paid work can make you poor. The assets you think you have are in fact liabilities, taking money from your pockets instead of placing them there. Take a good look at your balance sheet and get a grip on how the money flows in your life. Earned money is difficult to protect and are high-taxed income.

It could be like this. The “b” and “i” people gain financial freedom through systems built on other peoples money and other peoples time. These people work for passive or portfolio income containing investments, stocks and mutual funds. Tax reliefs, allowances and higher financial intelligence are important benefits. The most important thing is the mindset, which is a challenge for “e” and “s” people.

What do you want? Financial literacy and knowledge eliminates the obstacles. If you want to get out of the rat-race you have to change your attitudes, habits and social life. Get a mentor. The importance of socializing with people that are where you want to be is crucial. Income and expenses must be in control. Your boss is never going to make you rich. A new job is not the solution. Are you ready? Do you have the guts to jump to the other side?

Many people known to me have read Robert Kiyosaki – largely the concept of Mr. North and Mr. South – famously known as Rich Dad, Poor Dad concept.

There are many things that Kiyosaki says – let us take 2 of them today:

1. No money is made from real estate, equities, commodities….it is made from knowledge about these products. Absolutely no doubting this statement. Surely Knowledge is King – and makes money for you. So it is not uncommon to see people lose money in all these markets as well as see people make tons of money from these markets. So agree with Mr RK fully and completely.

2. Invest for cash flow, not for capital gain: This is a little difficult to understand, and far more difficult to accept. What he means is you should be buying properties for getting rent. In the Indian context, more importantly in the Mumbai context, it is impossible to achieve.

Let us say you buy a property in Worli for Rs. 120 Million (Rupees 12 crores) – you will end up paying about Rs. 12 lakhs PER MONTH as EMI and you will get about Rs. 300,000 as rent. This is a huge NEGATIVE cash flow and a terrible gearing.

Robert says this concept cannot be used in equity shares because when there is a slowdown companies reduce dividends. He forgets tenants re negotiate rents. Recently a friend replaced a tenant at 60% of the previous rent.

What Robert means is ‘Invest for value’ – easier said than done. Over the last 4-6 months I have added a few shares – just because of the good dividend yield. My dad’s portfolio is full of dividend yield shares like Colgate, Cummins, Tata Power, Coromandel Fertiliser, EID Parry, …however many of them BECAME dividend yield scrips only because of a bonus or a split.

At the time of buying these were not screaming buys. So if you accept that all investing is value investing, you are right. However if RK says value investing cannot happen in equities, HE IS WRONG. Also value investing through dividends requires patience. If you cannot see value coming in the form of growth – you would have missed Infosys, Hero HOnda, Bharti, Reliance, …among others. You would have been stuck with Cable Corporation, Scindia steam shipping, etc.

So it is the ability to see value – either in the form of growth, special situation (turnaround, new MD sweeping clean, sale of a division or the purchase of some new lines, etc. which creates wealth.

Let us say VISION creates VALUE. Value can either be cash flow or capital gains.

After watching so many people losing their homes, their money and so many other things the past few months to a year, people are convinced that the best investment decision one can make in today’s recession is to stay away from the real estate market. Only a few people are financially intelligent enough to actually see the opportunity in this housing crash to make money and become wealthy.

It is a basic rule in the investing game which everybody knows that you should buy when the price is low and sell when the price is high. With a growing database of foreclosed homes in many US states, some people are actually making money during this housing market crash.

As the prices for foreclosed homes and even new homes continuous to drop every month, real estate investors are being lured back into the market. Just an example, the median price for foreclosed homes in Las Vegas is $99,000 for all cash deals.

However, before you decide to join their game, there are a few questions you need to ask before buying a home to invest:
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Robert Kiyosaki, John E. Lang and others explain how to create and keep your wealth.
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