Are You Planning to Be Rich or Are You Planning to Be Poor?

Investor Lesson #5:
Are You Planning to Be
Rich or Are You Planning
to Be Poor?
“Most people are planning to be poor,” said rich dad.
“What?” I replied in disbelief. “Why do you say that and how can you say
that?”
“I just listen to what people say,” said rich dad. “If you want to see a person’s
past, present, and future, just listen to his or her words.”

The Power of Words
Rich dad’s lesson on the power of words was very powerful. He asked, “Have
you ever heard someone say, ‘It takes money to make money’?”
Standing to get two soft drinks from the refrigerator, I replied, “Yes. I hear it
all the time. Why do you ask?”
“Because the idea that it takes money to make money is one of the worst ideas
there is. Especially if a person wants more money,” said rich dad.
Handing rich dad his soft drink, I said, “I don’t understand. You mean it
doesn’t take money to make money?”
“No,” said rich dad, shaking his head. “It does not take money to make money.
It takes something available to all of us and is a lot less expensive to obtain than
money. In fact, in many cases, what it takes is free.”
That statement made me very curious but he would not tell me what it was.
Instead, as the lesson on investing ended, he gave me an assignment. “Before we
meet again, I want you to invite your dad out to dinner…a long, slow dinner. All
through the dinner, I want you to pay careful attention to the specific words he
uses. After you hear his words, begin to pay attention to the message his words are
sending.”
By this time, I was accustomed to rich dad giving me strange assignments,
assignments that seemed unrelated to the subject we were discussing or studying.
Yet he was a firm believer in experience first and lesson second. So I called my
dad and set up a date for dinner at his favorite restaurant.
About a week later, rich dad and I met again. “How was dinner?” he asked.
“Interesting,” I replied. “I listened very carefully to his choice of words and
the meaning of, or thoughts behind, the words.”
“And what did you hear?”
“I heard, ‘I’ll never be rich,’” I said. “But I’ve heard that most of my life. In
fact, he often said to the family, ‘The moment I decided to become a
schoolteacher, I knew I’d never be rich.’”
“So you’ve heard some of the same lines before?” inquired rich dad.
I nodded, saying, “Many times. Over and over again.”
“What else have you heard repeatedly?” asked rich dad.
“‘Do you think money grows on trees?’ ‘Do you think I’m made of money?’
‘The rich don’t care about people like I do.’ ‘Money is hard to get.’ ‘I’d rather be
happy than be rich,’” I replied.
“Now do you know what I mean when I say you can see people’s past,
present, and future by listening to their words?” asked rich dad.
Nodding, I said, “And I noticed something else.”
“And what was that?” asked rich dad.
“You have the vocabulary of a businessman and an investor. My dad has the
vocabulary of a schoolteacher. You use words such as ‘capitalization rates,’
‘financial leverage,’ ‘EBIT,’ ‘producer price index,’ ‘profits,’ and ‘cash flow.’ He
uses words such as ‘test scores,’ ‘grants,’ ‘grammar,’ ‘literature,’ ‘government
appropriations,’ and ‘tenure.’”
Rich dad smiled as he said, “It does not take money to make money. It takes
words. The difference between a rich person and a poor person is that person’s
vocabulary. All a person needs to do to become richer is increase his or her
financial vocabulary. And the best news is, most words are free.”
During the 1980s, I spent much time teaching entrepreneurship and investing.
During that time, I became acutely aware of people’s vocabulary and how their
words related to their financial well-being. Upon further research, I found out that
there are approximately 2 million words in the English language. The average
person has command of approximately 5,000 words. If people want to begin
increasing their financial success, it begins with increasing their vocabulary in a
certain subject. For example, when I was investing in small real estate deals such
as single-family rental properties, my vocabulary increased in that subject area.
When I shifted to investing in private companies, my vocabulary had to increase
before I felt comfortable investing in such companies.
In school, lawyers learn the vocabulary of law, medical doctors learn the
vocabulary of medicine, and teachers learn the vocabulary of teachers. If a person
leaves school without learning the vocabulary of investing, finance, money,
accounting, corporate law, taxation, it is difficult to feel comfortable as an
investor.
One reason I created the educational board game CASHFLOW was to
familiarize non-investors with the vocabulary of investing. In all our games, the
players quickly learn the relationships behind the words of accounting, business,
and investing. By repeatedly playing the games, the players learn the true
definition of such misused words as “asset” and “liability.”
Rich dad often said, “More than not knowing the definitions of words, using
the wrong definition to a word is what really causes long-term financial problems.
Nothing is more destructive to a person’s financial stability than to call a ‘liability’
an ‘asset.’” That is why he was a stickler for the definition of financial words. He
would say, the word “mortgage” comes from “mortir,” French for “death.” So a
mortgage is “an engagement until death.” “Real estate” does not mean “real” in
English. Real estate really comes from the Spanish words meaning royal estate.
That is why to this day, we do not own our property. We only technically control
our real estate. We do not really own it. The government owns our property and
taxes us to use it.
And that is why rich dad would often say, “It does not take money to make
money. It takes a rich person’s vocabulary to make money and more importantly,
keep money.”
So as you read this book, please be aware of the different words that may be
used. And always remember that one of the fundamental differences between a
rich person and a poor person is his or her words…and words are free.
Planning to Be Poor
After this lesson with rich dad, by simply listening to others’ words, I began to
notice why most people are unconsciously planning to be poor. Today, I often hear
people say, “When I retire, my income will go down.” And it does.
They also often say, “My needs will go down after I retire, so that is why I
will need less income.” But what they often fail to realize is that while some
expenses do go down, other expenses go up. And often these expenses—such as
full-time nursing home care when they are very old, if they are lucky enough to
become very old—are large. An average nursing home for the elderly can cost
$5,000 a month. That is more than many people’s monthly incomes today.
Other people say, “I don’t need to plan. I have a retirement and medical plan
from my work.” The problem with such thinking is that there is more to an
investment plan than simply investments and money. A financial plan is important
before someone begins to invest because it needs to take into consideration many
different financial needs. These needs include college education, retirement,
medical costs, and long-term health care. Many of these often-large and pressing
needs can be provided for by investing in products other than stocks and bonds or
real estate, such as insurance products and different investment vehicles.

The Future
I write about money to help educate people to provide for their long-term
financial well-being. Ever since the advent of Information Age retirement plans,
which are 401Ks in America and Superannuation plans in Australia and Registered
Retirement Savings Plans (RRSP) in Canada, I have grown concerned about the
people who are not prepared for the Information Age. At least in the Industrial Age
a company and the government did provide some financial aid for a person after
his or her working days were over. Today, when a person’s 401K or “cash balance
retirement plan” (which isn’t a traditional pension) is drained dry, it will be the
individual’s problem, not the company’s.
It is imperative that our schools begin to teach young people to invest for their
long-term health and financial well-being. If we do not, we will have a massive
socioeconomic time bomb on our hands.
I often say to my classes, “Be sure you have a plan. First, ask yourself if you
are planning to be rich or if you are planning to be poor. If you are planning to be
poor, the older you get, the more difficult you will find the financial world.” Rich
dad said to me many years ago, “The trouble with being young is that you don’t
know what it feels like to be old. If you knew what being old felt like, you would
plan your financial life differently.”

Planning for Being Old

It is important to plan as early in life as possible. When I say this to my
classes, most of my students nod in agreement. No one disagrees on the
importance of planning. The problem is, very few people actually do it.
Realizing that most people agreed that they needed to write a financial plan,
but few were going to take the time to do it, I decided to do something about it.
About an hour before lunch in one of these classes, I found some cotton
clothesline and cut it into different lengths. I asked the students to take one piece
of line and tie each end around one of their ankles, much like one would hobble a
horse. With their ankles tied about a foot apart, I gave them another piece of the
line and had them loop it around their neck and tie it back down at their ankles.
The overall result was that they were hobbled at the ankles and instead of standing
erect, they stooped over at about a 45-degree angle.
One of the students asked if this was a new form of Chinese water torture.
“No,” I replied. “I’m just taking each of you into the future, if you’re lucky to live
so long. The ropes now represent what old age could feel like.”
A slow moan came from the class. A few were getting the picture. The hotel
staff then brought in lunch on long tables. The lunch consisted of sandwiches,
salad, and beverages. The problem was, the cold cuts were simply stacked, the
bread was not sliced, the salad was not made, and the beverages were the dry mix
type that had to be combined with water. The students, now stooped and aged, had
to prepare their own lunch. For the next two hours, they struggled to slice their
bread, stack their sandwiches, make their salads, mix their drinks, sit, eat, and
clean up. Naturally, many also needed to go to the rest room during these two
hours.
At the end of the two hours, I asked them if they wanted to take a few
moments to write out a financial plan for their life. The answer was an enthusiastic
“Yes.” It was interesting to observe them actively taking an interest in what they
planned to do once the ropes came off. Their interest in planning had increased
dramatically once their point of view on life had been changed.
As rich dad said, “The problem with being young is that you don’t know what
it feels like to be old. If you knew what being old felt like, you would plan your
financial life differently.” He also said, “The problem with many people is that
they plan only up to retirement. Planning to retirement is not enough. You need to
plan far beyond retirement. In fact, if you’re rich, you should plan for at least three
generations beyond you. If you don’t, the money could be gone soon after you’re
gone. Besides, if you don’t have a plan for your money before you depart this
earth, the government does.”

Mental Attitude Quiz
Many times, we do not pay close attention to our silent and seemingly
unimportant thoughts. Rich dad said, “It’s not what we say out loud that
determines our lives. It’s what we whisper to ourselves that has the most
power.”
So the mental attitude questions are:
1.Are you planning to be rich or are you planning to be poor?

Rich____ Poor____

2.Are you willing to pay more attention to your deep, often silent,
thoughts?
Yes_____ No_____

Are you willing to invest time to increase your financial vocabulary?
A first goal of learning one new financial word a week is doable.
3.Simply find a word, look it up in the dictionary, find more than one
definition for the word, and make a mental note to use the word in a
sentence that week.
Yes_____ No_____

Rich dad was a stickler for words. He often said, “Words form thoughts,
thoughts form realities, and realities become life. The primary difference
between a rich person and a poor person is the words he or she uses. If you
want to change a person’s external reality, you need to first change that
person’s internal reality. That is done through first changing, improving, or
updating the words he or she uses. If you want to change people’s lives, first
change their words. And the good news is, words are free.”

Investing Is a Plan, Not a Product or Procedure

Investor Lesson #4:
Investing Is a Plan, Not a
Product or Procedure
I am often asked questions like, “I have $10,000 to invest. What do you
recommend I invest in?”
And my standard reply is, “Do you have a plan?”
A few months ago, I was on a radio station in San Francisco. The program was
on investing and was hosted by a very popular local stockbroker. A call came in
from a listener wanting some investment advice. “I am 42 years old, I have a good
job, but I have no money. My mother has a house with a lot of equity in it. Her
home is worth about $800,000 and she owes only $100,000 on it. She said she
would let me borrow some of the equity out so I could begin investing. What do
you think I should invest in? Should it be stocks or real estate?”
Againmy reply was, “Do you have a plan?”
“I don’t need a plan,” was the reply. “I just want you to tell me what to invest
in. I want to know if you think the real estate market is better or the stock market.”
“I know that is what you want to know . . . but do you have a plan?” I again
asked as politely as possible.
“I told you I don’t need a plan,” said the caller. “I told you my mother will
give me the money. So I have money. That’s why I don’t need a plan. I’m ready to
invest. I just want to know which market you think is better, the stock market or
the real estate market. I also want to know how much of my mom’s money I
should spend on my own home. Prices are going up so fast here in the Bay Area
that I don’t want to wait any longer.”
Deciding to take another tack, I asked, “If you’re 42 years old and have a good
job, why is that you have no money? And if you lose your mother’s equity money
from her home, can she continue to afford the home with the added debt? And if
you lose your job or the market crashes, can you continue to afford a new house if
you can’t sell it for what you paid for it?”
To an estimated 400,000 listeners came his answer. “That is none of your
business. I thought you were an investor. You don’t need to dig into my private
life to give me tips on investing. And leave my mother out of this. All I want is
investment advice, not personal advice.”
Investment Advice Is Personal Advice
One of the most important lessons I learned from my rich dad was that
“Investing is a plan, not a product or procedure.” He went on to say, “Investing is
a very personal plan.”
During one of my lessons on investing, he asked, “Do you know why there are
somany different types of cars and trucks?”
I thought about the question for a while, finally replying, “I guess because
there are so many different types of people and people have different needs. A
single person may not need a large nine-passenger station wagon but a family with
five kids would need one. And a farmer would rather have a pickup truck than a
two-seater sports car.”
“That’s correct,” said rich dad. “And that is why investment products are often
called ‘investment vehicles.’”
“They’re called ‘vehicles’?” I repeated. “Why investment vehicles?”
“Because that is all they are,” said rich dad. “There are many different
investment products, or vehicles, because there are many different people with
many different needs, just as a family with five children has different needs than a
single person or a farmer.”
“But why the word ‘vehicles’?” I again asked.
“Because all a vehicle does is get you from point A to point B,” said rich dad.
“An investment product or vehicle simply takes you from where you are
financially to where you want to be, sometime in the future, financially.”
“And that is why investing is a plan,” I said nodding my head quietly. I was
beginning to understand.
“Investing is like planning a trip, let’s say from Hawaii to New York.
Obviously, you know that for the first leg of your trip, a bicycle or car will not do.
That means you will need a boat or a plane to get across the ocean,” said rich dad.
“And once I reach land, I can walk, ride a bike, travel by car, train, bus, or fly
to New York,” I added. “All are different vehicles.”
Rich dad nodded his head. “And one is not necessarily better than the other. If
you have a lot of time and really want to see the country, then walking or riding a
bike would be the best. Not only that, you will be much healthier at the end of the
trip. But if you need to be in New York tomorrow, then obviously flying from
Hawaii to New York is your best and only choice if you want tomake it on time.”
“So many people focus on a product, let’s say stocks, and then a procedure,
let’s say trading, but they don’t really have a plan. Is that what you are saying?” I
asked.
Rich dad nodded. “Most people are trying to make money by what they think
is investing. But trading is not investing.”
“What is it, if it is not investing?” I asked.
“It’s trading,” said rich dad. “And trading is a procedure or technique. A
person trading stocks is not much different than a person who buys a house, fixes
it up, and sells it for a higher profit. One trades stocks; the other trades real estate.
It’s still trading. In reality, trading is centuries old. Camels carried exotic wares
across the desert to consumers in Europe. So a retailer is also a trader in a sense.
And trading is a profession. But it is not what I call investing.”
“And to you, investing is a plan, a plan to get you from where you are to
where you want to be,” I said, doing my best to understand rich dad’s distinctions.
Rich dad nodded and said, “I know it’s picky and seems a minor detail. Yet, I
want to do my best to reduce the confusion around this subject of investing. Every
day, I meet people who think they’re investing, but financially they’re going
nowhere. They might as well be pushing a wheelbarrow in a circle.”
It Takes More Than One Vehicle
In the previous chapter, I listed a few of the different types of investment
products and procedures available. More are being created every day because so
many people have so many different needs. When people are not clear on their
own personal financial plans, all these different products and procedures become
overwhelming and confusing.
Rich dad used the wheelbarrow as his vehicle of choice when describing many
investors. “Too many so-called investors get attached to one investment product
and one investment procedure. For example, a person may invest only in stocks or
a person may invest only in real estate. The person becomes attached to the vehicle
and then fails to see all the other investment vehicles and procedures available.
The person becomes an expert at that one wheelbarrow and pushes it in a circle
forever.”
One day when he was laughing about investors and their wheelbarrows, I had
to ask for further clarification. His response was, “Some people become experts at
one type of product and one procedure. That is what I mean by becoming attached
to the wheelbarrow. The wheelbarrow works; it hauls a lot of cash around, but it is
still a wheelbarrow. A true investor does not become attached to the vehicles or
the procedures. A true investor has a plan and has multiple options as to
investment vehicles and procedures. All a true investor wants to do is get from
point A to point B safely and within a desired time frame. That person doesn’t
want to own or push the wheelbarrow.”
Still confused, I asked for greater clarification. “Look,” he said, becoming a
little frustrated, “if I want to go from Hawaii to New York, I have a choice of
many vehicles. I don’t really want to own them. I just want to use them. When I
climb on a 747, I don’t want to fly it. I don’t want to fall in love with it. I just want
to get from where I am to where I am going. When I land at Kennedy Airport, I
want to use the taxi to get from the airport to my hotel. Once I arrive at the hotel,
the porter uses a handcart to move my bags from the curb to the room. I don’t want
to own or push that handcart.”
“So what is the difference?” I asked.
“Many people who think they are investors get attached to the investment
vehicle. They think they have to like stocks or like real estate to use them as
investment vehicles. So they look for investments they like and fail to put together
a plan. These are the investors who wind up traveling in circles, never getting from
financial point A to financial point B.”
“So you don’t necessarily fall in love with the 747 you fly on, just as you
don’t necessarily fall in love with your stocks, bonds, mutual funds, or office
buildings. They are all simply vehicles,” I stated, “vehicles to take you to where
you want to go.”
Rich dad nodded. “I appreciate those vehicles, I trust that people take care of
those vehicles, I just don’t get attached to the vehicles . . . nor do I necessarily
want to own or spend my time driving them.”
“What happens when people get attached to their investment vehicles?” I
asked.
“They think that their investment vehicle is the only vehicle, or it is the best
vehicle. I know people who invest only in stocks as well as people who invest only
in mutual funds or real estate. That is what I mean by getting attached to the
wheelbarrow. There is not anything necessarily wrong with that type of thinking.
It’s just that they often focus on the vehicle rather than their plan. So even though
they may make a lot of money buying, holding, and selling investment products,
that money may not take them to where they want to go.”
“So I need a plan,” I said. “And my plan will then determine the different
types of investment vehicles I will need.”
Rich dad nodded, saying, “In fact, don’t invest until you have a plan. Always
remember that investing is a plan . . . not a product or procedure. That is a very
important lesson.”
Mental Attitude Quiz
Before a person builds a house, he or she usually calls in an architect to draw
up the plans. Could you imagine what could happen if someone just called in
some people and began to build a house without a plan? Well, that is what
happens to many people’s financial houses.
Rich dad guided me in writing out financial plans. It was not necessarily an
easy process, nor did it make sense at first. But after a while, I became very
clear on where I was financially, and where I wanted to go. Once I knew that,
the planning process became easier. In other words, for me, the hardest part
was figuring out what I wanted. So the mental attitude questions are:

Are you willing to invest the time to find out where you are
financially today and where you want to be financially, and are you
willing to spell out how you plan to get there? In addition, always
remember that a plan is not really a plan until it is in writing and you
can show it to someone else.
Yes ____ No ____

Are you willing to meet with at least one professional financial
advisor and find out how his or her services may help you with your
long term investment plans?
Yes ____ No ___.
You may want to meet with two or three financial advisors just to find out the
differences in their approach to financial planning.

Why Investing Is Confusing

Investor Lesson #3:
Why Investing Is
Confusing?
One day, I was waiting in rich dad’s office and he was speaking on the phone.
He was saying things such as, “So you’re long today?” and “If the prime drops,
what will that do to the spread?” and “OK, OK, OK, now I understand why you’re
buying an option straddle to cover that position” and “You’re going to short that
stock? Why not use a put option instead of a short?”
After rich dad put his phone down, I said, “I have no idea what you were
talking about. Investing seems so confusing.”
Rich dad smiled and said, “What I was talking about was not really investing.”
“It wasn’t investing? Then what was it? It sounded like what investors on TV
and in the movies sound like.”
Rich dad smiled and laughed, saying, “First of all, investing means different
things to different people. That is why it seems so confusing. What most people
call investing is not really investing. People are all talking about different things
yet they often think they are talking about the same thing.”
“What?” I said, screwing up my face. “People are talking about different
things yet thinking they are talking about the same thing?”
Again rich dad laughed. The lesson had begun.
Investing Means Different Things to Different People
As rich dad began the lesson that day, he repeatedly stressed that main point.
Investing means different things to different people. The following are some of the
highlights of this important lesson:
Different People Invest in Different Things
1. Rich dad explained some of the differences in value.
a.Some people invest in large families. A large extended
family is a way to ensure care for the parents in their
old age.

b.People invest in a good education, job security, and
benefits. The individual and his or her marketable skills
become the assets.

c.Some people invest in external assets. In America, about
45% of the population owns shares in companies. This
number is growing as people realize that job security
and lifetime employment are less and less guaranteed.

There Are Many Different Investment
Products
2. Here is a sample of some of the different types of investments:
a.Stocks, bonds, mutual funds, real estate, insurance,
commodities, savings, collectibles, precious metals,
hedge funds, etc.

b.Each one of these groups can then be broken down into
different subgroups. Let’s take stocks, for example.
Stocks can be subdivided into:

1. Common stock
2. Preferred stock
3. Stocks with warrants
4. Small cap stock
5. Blue chip stock
6. Convertible stock
7. Technical stock
8. Industrial stock
9. And on and on and on
Real estate can be subdivided into:
1. Single family
2. Commercial office
3. Commercial retail
4. Multi-family
5. Warehouse
6. Industrial
7. Raw land
8. Raw land to the curb
9. And on and on and on
Mutual funds can be subdivided into:
1. Index fund
2. Aggressive growth fund
3. Sector fund
4. Income fund
5. Closed end fund
6. Balanced fund
7. Municipal bond fund
8. Country fund
9. And on and on and on
Insurance can be subdivided into:
1. Whole, Term, Variable Life
2. Universal, Variable Universal
3. Blended (whole and term in one policy)
4. First, second, or last to die
5. Used for Funding Buy-Sell Agreement
6.Used for Executive Bonus and Defferred
Compensation

7. Used for Funding Estate taxes
8. Used for Non Qualified retirement benefits
9. And on and on and on
There are many different investment products, each
designed to do something different. That is another
reason why the subject of investing is so confusing.
c.
There Are Different Investment Procedures
3.Rich dad used the word “procedure” to describe the technique,
method, or formula for buying, selling, trading, or holding these
investment products. The following are some of the different types
of investment procedures:

1. Buy, hold, and pray (long)
2. Buy and sell (trade)
3. Sell then buy (short)
4. Option buying and selling (trade)
5. Dollar cost averaging (long)
6. Brokering (trade no position)
7. Saving (collecting)
4.Many investors are classified by their procedures and their products.
For example:

1. I am a stock trader
2. I speculate in real estate.
3. I collect rare coins.
4. I trade commodity future options.
5. I am a day trader.
6. I believe in money in the bank.
These are all examples of different types of investors, their product specialties,
and their investing procedure. All of this adds to the confusion on the subject of
investing because under the banner of investing there are people who are really:
a. Gamblers
b. Speculators
c. Traders
d. Savers
e. Dreamers
f. Losers
Many of these individuals call themselves investors and, technically they are,
which is why the subject of investing is even more confusing.
No One Is an Expert at Everything
“Investing means different things to different people.” Rich dad also said,
“There is no one person who can possibly be an expert at the entire subject. There
are many different investment products and many different investment
procedures.”
Everyone Has a Bias
A person who is good at stocks will say, “Stocks are your best investment.” A
person who loves real estate will say, “Real estate is the basis of all wealth.”
Someone who hates gold will say, “Gold is an obsolete commodity.”
Then you add procedure bias and you really become confused. Some people
say “Diversify. Don’t put all your eggs in one basket,” and still others such as
Warren Buffet, America’s greatest investor, says, “Don’t diversify. Put all your
eggs in one basket and watch that basket closely.”
All of this personal bias from so-called experts adds to the confusion that
shrouds the subject of investing.
Same Market, Different Directions
Adding to the confusion is that everyone has a different opinion on the
direction of the market and the future of the world. If you watch the financial news
stations, they will have one so-called expert who says, “The market is over-heated.
It will crash in the next six weeks.” Ten minutes later, another expert will come on
and say, “The market is set to go up even further. There will be no crash.”
Late to the Party
A friend of mine recently asked, “Every time I hear of a hot stock, by the time
I buy it, the stock is heading down. So I buy at the top because it’s the hot popular
stock and then a day later it starts heading down. Why am I always late to the
party?”
Another complaint I often hear is: “The stock drops in price so I sell it, and the
next day it goes up.Why does that happen?”
I call this the “late to the party” phenomenon or the “you sold too early”
phenomenon. The problem with investing in something because it’s popular or
rated as the #1 fund for the past two years is that real investors have already made
their money in that investment. They were in it early and got out at the top. For
me, nothing is more frustrating than to hear someone say, “I bought it at $2 a share
and it’s now at $35 a share.” Such stories or hot tips do me no good and only
frustrate me. That is why today, when I hear such tales of instant wealth and fast
money in the market, I just walk away and choose not to listen . . . because such
stories are not really stories about investing.
This Is Why Investing Is Confusing
Rich dad often said, “Investing is confusing because it is a very large subject.
If you look around you, you’ll see that people have invested in many different
things. Look at your appliances. Those are all products from companies that
people invested in. You receive your electricity from a utility company that people
invest in. Once you understand that, then look at your car, the gas, the tires, seat
belts, windshield wipers, spark plugs, the roads, the stripes on the road, your soft
drinks, the furniture in your house, the shopping center your favorite store is in,
the office buildings, the bank, the hotels, the airplane overhead, the carpet in the
airport, etc. All of these things are there because someone invested in the business
or building that delivers you the things that make life civilized. That is what
investing really is all about.”
Rich dad often ended his lessons on investing with this statement: “Investing is
such a confusing subject for most people because what most people call investing
is not really investing.”
In the next chapter, rich dad guides me into reducing the confusion and into
what investing really is.
Mental Attitude Quiz
Investing is a vast subject with many different people having as many different
opinions:
1.Do you realize that investing means different things to different
people?
Yes_____ No_____

2.Do you realize that no one person can know all there is to know
about the subject of investing?
Yes_____ No_____

3.Do you realize that one person may say an investment is good and
another person may say the same investment is bad, and realize both
could have valid points?
Yes_____ No_____

4.Are you willing to keep an open mind to the subject of investing and
listen to different points of view on the subject?
Yes_____ No_____

5.Are you now aware that focusing on specific products and
procedures may not necessarily be investing?
Yes_____ No_____

6.Do you realize that an investment product that is good for one
person may not be good for you?
Yes_____ No_____

What Kind of World Do You See?

Investor Lesson #2:

One of the most startling differences between my rich dad and poor dad was
what kind of world they saw. My poor dad always saw a world of financial
scarcity. That view was reflected when he said, “Do you think money grows on
trees?” or “Do you think I’m made of money?” or “I can’t afford it.”
When I spent time with my rich dad, I began to realize that he saw a
completely different world. He could see a world of too much money. That view
was reflected when he said, “Don’t worry about money. If we do the right things,
there will always be plenty of money,” or “Don’t let not having money be an
excuse for not getting what you want.”
In 1973, during one of rich dad’s lessons, he said, “There are only two kinds
of money problems. One problem is not enough money. The other problem is too
muchmoney. Which type of money problem do you want?”
In my classes on investing, I spend a lot of time on this subject. Most people
come from families where the money problem was not enough money. Since
money is only an idea, if your idea is that there is not enough money, then that is
what your reality will be. One of the advantages I had, coming from two families,
was that I could see both types of problems . . . and rest assured, both are
problems. My poor dad always had problems of not enough money and my rich
dad always had problems of toomuch money.
Rich dad had a comment on that strange phenomenon. He said, “People who
suddenly become rich—by things such as inheritance, a big jackpot from Las
Vegas, or the lottery—suddenly become poor again because psychologically, all
they know is a world of not enough money. So they lose all their suddenly found
wealth and go back to repeating the only world of money they know: a world of
not enough money.”
One of my personal struggles was shaking the idea that the world was a world
of not enough money. From 1973 on, rich dad had me become very aware of my
thoughts when it came to the subjects of money, working, and becoming rich. Rich
dad truly believed that poor people remained poor simply because that was the
only world they knew. Rich dad would say, “Whatever your reality is aboutmoney
inside of you is the reality of money outside of you. You cannot change your
outside reality until you first change your inside reality about money.”
Rich dad once outlined what he saw as some of the causes of scarcity as
differences in peoples’ attitudes:
1. The more security your need, the more scarcity there is in your life.
2. The more competitive you are, the more scarcity in your life. Which is why
people compete for jobs and promotions at work and compete for grades in school.
3. To gain more abundance a person needs more skills and needs to be more
creative and cooperative. People who are creative, have good financial and
business skills, and are cooperative often have lives of increasing financial
abundance.
I could see these differences in attitudes between my two dads. My real dad
always encouraged me to play it safe and seek security. My rich dad encouraged
me to develop skills and be creative. The second half of this book is about how to
take your creative ideas and create a world of abundance rather than a world of
scarcity.
During our discussions about scarcity rich dad would break out a coin and say,
“When a person says ‘I can’t afford it,’ that person sees only one side of the coin.
The moment you say ‘How can I afford it?,’ you begin to see the other side. The
problem is, even when people see the other side, they see it with only their eyes.
That is why poor people see rich people doing what rich people do on the surface
but they fail to see what rich people are doing inside their minds. If you want to
see the other side of the coin, you have to see what is going on inside a very rich
person’s mind.” The second half of this book is about what goes on in a rich
person’s mind.
Years later, when lottery winners began going broke I asked rich dad why this
was happening. His reply was, “A person who suddenly comes into a lot of money
and goes broke, goes broke because they still see only one side of the coin. In
other words they handle the money in the same way they always did, which was
the reason they were poor or struggled in the first place. They see only a world of
not enough money. The safest thing that person can do is just put the money in the
bank and live off the interest only. People who can see the other side of the coin
would take that money and multiply it rapidly and safely. They can do that
because they see the other side of the coin, the side of the coin where there is a
world of too much money and they use their money to get to the other side faster
while everyone else uses money to become poorer faster.”
In the late 1980’s after rich dad retired and turned his empire over to Mike, he
called me in for a brief meeting. Before the meeting began he showed me a bank
statement with $39 million dollars in cash in it. I gasped as he said, “And this is
only in one bank. I am retired now because it is a full time job to keep taking this
cash out of my banks and moving it into more productive investments. I repeat it is
a full time job that becomes more challenging every year.”
As the meeting ended rich dad said, “I spent years training Mike to build the
engine that produces this much money. Now that I am retired he is running the
engine that I built. The reason I can retire with confidence is because Mike knows
not only how to run the engine, he can fix it if it breaks. Most rich kids lose their
parents’ money because although they grew up in extreme wealth, they never
really learned how to build an engine or fix it after it is broken. In fact, too many
rich kids are the very people who break the engine. They grew up on the rich side
of the coin, but they never learned what it takes to get to that side. You have a
chance, with my guidance, to make the transition and stay on the other side.”
A big part of taking control of myself was taking control of my internal reality
about money. I have had to constantly remind myself that there is a world of too
muchmoney, because in my heart and soul, I have often felt like a poor person.
One of the exercises rich dad had me do whenever I felt the surge of panic in
my heart and stomach, the panic that comes from the fear of not having enough
money, was to simply say, “There are two kinds of money problems. One problem
is not enough money and the other is too much money. Which one do I want?” I
would ask this question mentally even though my core being was in a state of
financial panic.
I am not one of these wishful-thinking people or a person who believes solely
in the power of affirmation. I asked myself that question to combat my inherited
point of view on money. Once my gut was calmed down, I would then ask my
mind to begin finding solutions to whatever was financially challenging me at the
time. Solutions could mean seeking new answers, finding new advisors, or
attending a class on a subject I was weak on. The main purpose for combating my
core panic was to allow me to calm down so I could move forward again.
I have noticed that most people let their panic about money defeat them and
dictate the terms and conditions of their lives. Hence, they remain terrified about
risk and money. As I wrote in CASHFLOW Quadrant, people’s emotions often run
their lives. Emotions such as fear and doubt lead to low self-esteem and a lack of
self-confidence.
In the early 1990s, Donald Trump was nearly $1 billion in debt personally and
$9 billion in debt corporately. An interviewer asked Trump if he was worried.
Trump replied, “Worrying is a waste of time. Worrying gets in my way of working
to solve these problems.” I have noticed that one of the main reasons people are
not rich is that they worry too much about things that might never happen.
Rich dad’s investment lesson #2 was to mentally choose to see both worlds
. . . a world of not enough money and a world of too much money. Later, rich dad
went into the importance of a financial plan. Rich dad strongly believed in having
a financial plan for when you did not have enough money as well as a financial
plan for when you will have too much money. He said, “If you do not have a plan
for having too much money, then you will lose all your money and go back to the
only plan you know, which is what 90% of the population knows: a world of not
enough money.”
Security and Scarcity
Rich dad said, “The more a person seeks security the more scarcity they will
have in their life. Security and scarcity go hand in hand. That is why people who
seek job security or guarantees are often the people with less abundance in their
life. One of the reasons the 90/10 rule of money holds true is because most people
spend their lives seeking more security instead of seeking more financial skills.
The more financial skills you have the more abundance you will have in your life.”
It was these financial skills that gave rich dad the power to begin acquiring
some of the most valuable real estate in Hawaii even though he had very little
money. These same financial skills give people the power to take an opportunity
and turn it into millions of dollars. Most people can see opportunities, they just
cannot turn that opportunity into money and that is why they often seek even more
security. Rich dad also said, “The more a person seeks security, the less they can
see of the opportunities that abound. They see only one side of the coin and never
see the other side. That is why the more they seek security the less opportunity
they see on the flip side of the coin. As the great baseball player Yogi Bera once
said, ‘Strike out just 7 out of 10 times and you’re in the Hall of Fame.’” In other
words, if he came to bat one thousand times in his baseball career, and if he could
strike out only 700 times, he would be in the Hall of Fame. After reading Yogi
Bera’s quote, rich dad said, “Most people are so security conscious that they live
their entire lives avoiding striking out just once.”
Mental Attitude Quiz
I came from a family that saw the world as a world of not enough money. My
personal challenge was to repeatedly remind myself that another kind of world
existed and that I needed to keep an open mind to see a world of both possibilities
for me.
So the mental attitude questions are:
1.Can you see that two different worlds of money can exist? A world
of not enough money and a world of too much money.
Yes___ No ____

2.If you currently live in a world of not enough money, are you willing
to see the possibility of you living in a world of too much money?
Yes___ No _____

The Choice

Investor Lesson #1:

The Choice



Rich dad’s lessons on investing began. “When it comes to money and
investing, people have three fundamental reasons or choices for investing. They
are:
1. To be secure,
2. To be comfortable, or
3. To be rich.”
Rich dad went on to say, “All three choices are important. The difference in
one’s life occurs when the choices are prioritized.” He continued by saying that
most people make their money and investment choices in that exact order. In other
words, their first choice when it comes to money decisions is security, second is
comfort, and third is to be rich. That is why most people make job security their
highest priority. After they have a secure job or profession, then they focus on
comfort. The last choice for most people is to be rich.
That day in 1973, rich dad said, “Most people dream of becoming rich, but it
is not their first choice.” He went on to say, “Only three out of a hundred people in
America are rich because of this priority of choices. For most people, if becoming
rich disturbs their comfort or makes them feel insecure, they will forsake
becoming rich. That is why so many people want that one hot investment tip.
People who make security and comfort their first and second choices look for
ways to get rich quick that are easy, risk free, and comfortable. A few people do
get rich on one lucky investment, but all too often they lose it all again.”
Rich or Happy
I often hear people say, “I’d rather be happy than be rich.” That comment has
always sounded very strange to me since I have been both rich and poor. And in
both financial positions, I have been both happy and unhappy. I wonder why
people think they have to choose between happiness and being rich.
When I reflect upon this lesson, it occurs to me that what people are really
saying is that “I’d rather feel secure and comfortable than be rich.” That is because
if they felt insecure or uncomfortable, they were not happy. For me, I was willing
to feel insecure and uncomfortable in order to be rich. I have been rich and poor as
well as happy and unhappy. But I assure you that when I was poor and unhappy, I
was much unhappier than when I was rich and unhappy.
I have also never understood the statement “Money does not make you
happy.” While there is some truth in it, I have always noticed that when I have
money, I feel pretty good. The other day, I found a $10 bill in my jeans pocket.
Even though it was only $10, it felt great finding it. Receiving money has always
felt better than receiving a bill for money I owe. At least that is my experience
with money. I feel happy when it comes in and sad when it leaves me.
Back in 1973, I put my priorities in this order:
1. To be rich
2. To be comfortable
3. To be secure
As stated earlier, when it comes to money and investing, all three priorities are
important. Which order you put them in is a very personal decision that should be
made before beginning to invest. My poor dad put “to be secure” as priority one,
and rich dad put “to be rich” as priority one. Before beginning to invest, it is
important to decide what your priorities are.
Mental Attitude Quiz
To be rich, comfortable, and secure are really personal core values. One is not
better than the other. I do know, however, that making the choice of which core
values are most important to you often has a significant long-term impact upon the
kind of life you choose. That is why it is important to know which core values are
most important to you, especially when it comes to the subject of money and
financial planning.
So the mental attitude quiz is:
List in order of importance which core values are most important to you:
1.
2.
3.
Some of you may need to work through your true feelings. Talk seriously with
your spouse or mentor. Make “pro” and “con” lists. Knowing what your personal
priorities are will save youmany agonizing decisions and sleepless nights later.
One of the reasons the 90/10 rule of money applies may be because 90% of
the people choose comfort and security over being rich.

Investments of the Rich

Although many things ran through my mind that night, I was most intrigued by
the idea that there were investments only for the rich, and then there were
investments for everyone else. I remembered that when I was a kid working for
rich dad, all he talked about was building his businesses. But now that he was rich,
all he talked about was his investments . . . investments for the rich. That day over
lunch, he had explained, “The only reason I built businesses was so I could invest
in the investments of the rich. The only reason you build a business is so that your
business can buy your assets. Without my businesses, I could not afford to invest
in the investments of the rich.”
Rich dad went on to stress the difference between an employee buying an
investment and a business buying an investment. He said, “Most investments are
too expensive when you purchase them as an employee. But they are much more
affordable if my business buys them for me.” I did not know what he meant by
that statement, but I knew this distinction was important. I was now curious and
anxious to find out what the difference was. Rich dad had studied corporate and
tax law and had found ways to make a lot of money using the laws to his
advantage. I drifted off that night excited about calling rich dad in the morning and
saying softly to myself, “investments of the rich.”
The Lessons Resume
I had spent many hours as a child sitting at a table in one of rich dad’s
restaurants as rich dad discussed the affairs of his business. At these discussions, I
would sit and sip my soda, while rich dad talked with his bankers, accountants,
attorneys, stockbrokers, real estate brokers, financial planners, and insurance
agents. It was the beginning of my business education. Between the ages of 9 and
18, I spent hours listening to these men and women solve intricate business
problems. But those lessons around the table ended when I left for four years of
college in New York, followed by five years of service with the Marine Corps.
Now that my college education was complete and my military duty nearly over, I
was ready to continue the lessons with rich dad.
When I called him the next day, he was ready to begin my lessons again. He
had turned the businesses over to Mike and was now semiretired. He was looking
for something to do rather than play golf all day.
When I was young, I did not know which dad to listen to when it came to the
subject of money. Both were good, hard-working men. Both were strong and
charismatic. Both said I should go to college and serve my country in the military.
But they did not say the same things about money or give the same advice about
what to become when I grew up. Now I could compare the results of the career
paths chosen by my rich dad and my poor dad.
In CASHFLOW Quadrant, the book that follows Rich Dad Poor Dad, my poor
dad advised me to “Go to school, get good grades, and then find a safe secure job
with benefits.” He was recommending a career path in this direction:

On the other hand, my rich dad said, “Learn to build businesses and invest
through your businesses.” He was recommending a career path that looked like
this:

The CASHFLOW Quadrant is about the core emotional differences and the
technical differences among the people found in each of the quadrants. These core
emotional and technical differences are important because they ultimately
determine which quadrant a person tends to favor and operate from. For example,
a person who needs job security will most likely seek the E quadrant. In the E
quadrant are people from janitors to presidents of companies. A person who needs
to do things on his or her own is often found in the S quadrant, the quadrant of the
self-employed or small business. I also say that “S” stands for solo and smart,
because this is where many of the professionals such as doctors, attorneys,
accountants, and other technical consultants are found.
The CASHFLOW Quadrant explains a lot about the difference between the S
quadrant—which is where most small-business owners operate—and the B
quadrant—which is the quadrant where big businesses are found. In this book, we
will go into much more detail about the technical differences, because it is here
that the differences between the rich and everyone else are found.
The Tax Laws Are Different
The differences between the quadrants play a very important role in this book.
The tax laws are different for the different quadrants. What may be legal in one
quadrant is illegal in another. These subtle differences make big differences when
it comes to the subject of investing. When discussing the subject of investing, my
rich dad was very careful to ask me from which quadrant I was planning to earn
my money.
The Lessons Begin
While Mike was busy running their empire, rich dad and I were having lunch
at a hotel on Waikiki Beach. The sun was warm, the ocean beautiful, the breeze
light, and the setting as close to paradise as you can get. Rich dad was shocked to
see me walk in wearing my uniform. He had never seen me in uniform before. He
had only seen me as a kid, dressed in casual clothes such as shorts, jeans, and
T-shirts. I guess he finally realized that I had grown up since leaving high school,
and by now had seen a lot of the world and fought in a war. I had worn my
uniform to the meeting because I was between flights and had to get back to the
base to fly that evening.
“So that is what you have been doing since leaving high school,” said rich dad.
I nodded my head and said, “Four years at the military academy in New York,
and four years in the Marine Corps. One more year to go.”
“I am very proud of you,” said rich dad.
“Thanks,” I replied. “But it will be nice to get out of a military uniform. It’s
really tough being spit on or stared at, or called ‘baby-killers’ by all these hippies
and people who are against the war. I just hope it ends soon for all of us.”
“I’m just glad Mike did not have to go,” said rich dad. “He wanted to enlist
but his poor health kept him out.”
“He was fortunate,” I replied. “I lost enough friends to that war. I would have
hated to have lost Mike too.”
Rich dad nodded his head and asked, “So what are your plans once your
military contract is up next year?”
“Well, three of my friends have been offered jobs with the airlines as pilots.
It’s tough getting hired right now but they say they can get me in through some
contacts they have.”
“So you’re thinking of flying with the airlines?” asked rich dad.
I nodded slowly. “Well, that’s all I’ve been doing . . . thinking about it. The
pay is OK, and benefits are good. And besides, my flight training has been pretty
intense,” I said. “I’ve become a pretty good pilot after flying in combat. If I fly for
a year with a small airline and get some multi-engine time, I will be ready for the
major carriers.”
“So is that what you think you are going to do?” asked rich dad.
“No,” I replied. “Not after what has happened to my dad and after having
lunch at Mike’s new home. I lay awake for hours that night and I thought about
what you said about investing. I realized that if I took a job with the airlines I
might someday become an accredited investor. But I realized that I might never go
beyond that level.”
Rich dad sat in silence, nodding ever so slightly. “So what I said hit home,”
rich dad said in a low voice.
“Very much so,” I replied. “I reflected on all the lessons you gave me as a kid.
Now I am an adult and the lessons have a new meaning to me.”
“And what did you remember?” asked rich dad.
“I remember you taking away my 10 cents per hour and making me work for
free,” I replied. “I remembered that lesson of not becoming addicted to a
paycheck.”
Rich dad laughed at himself and said, “That was a pretty tough lesson.”
“Yes it was,” I replied. “But a great lesson. My dad was really angry with you.
But now he is the one trying to live without a paycheck. The difference is he’s 52
and I was 9 when I got that lesson. After lunch at Mike’s, I vowed that I would not
spend my life clinging to job security just because I needed a paycheck. That is
why I doubt that I will seek a job with the airlines. And that is why I’m here
having lunch with you. I want to review your lessons on how to have money work
for me, so I don’t have to spend my life working for money. But this time, I want
your lessons as an adult. Make the lessons harder and give me more detail.”
“And what was my first lesson?” asked rich dad.
“The rich don’t work for money,” I said promptly. “They know how to have
money work for them.”
A broad smile came over rich dad’s face. He knew that I had been listening to
him all those years as a kid. “Very good,” he said. “And that is the basis of
becoming an investor. All investors do is learn how to have their money work hard
for them.”
“And that is what I want to learn,” I said quietly. “I want to learn and maybe
teach my dad what you know. He is in a very bad way right now, trying to start
over again at the age of 52.”
“I know,” said rich dad. “I know.”
So on a sunny day, with surfers riding the beautiful waves of the deep blue
ocean, my lessons on investing began. The lessons came in five phases, each phase
taking me to a higher level of understanding… understanding the thought process
of rich dad and his investment plan. The lessons began with preparing mentally
and taking control of myself . . . because that is the only place that investing really
takes place anyway. Investing ultimately begins and ends with taking control of
yourself.
The lessons on investment in Phase One of rich dad’s investment plan are all
about the mental preparation it takes before actually beginning to invest. Lying in
my bunk that night in 1973, in a dingy room on base, my mental preparation had
begun. Mike was fortunate enough to have a father who had accumulated great
wealth. I was not that fortunate. In many ways, he had a 50-year head start on me.
I had yet to start. That night, I began my mental preparation by making a decision
between job security as chosen by my poor dad, or pouring a foundation of real
wealth as chosen by my rich dad. That is where the process of investing truly
begins and where rich dad’s lessons on investing start. It starts with a very
personal decision . . . a mental choice to be rich, poor, or middle class. It is an
important decision, because whichever financial position in life you choose—be it
rich, poor, or middle class—everything in your life then changes.

Pouring a Foundation of Wealth

Returning to the dingy gray officers’ quarters on base that night was very
difficult. They had been fine when I left earlier that day, but after spending the
afternoon in Mike’s new home, the officers’ quarters seemed cheap, old, and tired.
As expected, my three roommates were drinking beer and watching a baseball
game on television. There were pizza boxes and beer cans everywhere. They did
not say much as I passed through the shared living area. They just stared at the TV
set. As I retired to my room and closed the door, I felt grateful that we all had
private rooms. I had much to think about.
At 25 years of age, I finally realized things that I could not understand as a kid
of 9, the age at which I first began working with rich dad. I realized that my rich
dad had been working hard for years pouring a solid foundation of wealth. They
had started on the poor side of town, living frugally, building businesses, buying
real estate, and working on their plan. I now understood that rich dad’s plan was to
become very wealthy. While Mike and I were in high school, rich dad had made
his move by expanding to different islands of the Hawaiian chain, buying
businesses and real estate. While Mike and I were in college, he made his big
move and became one of the major private investors in businesses in Honolulu and
parts of Waikiki. While I was flying for the Marine Corps in Vietnam, his
foundation of wealth was set in place. It was a strong and firm foundation. Now he
and his family were enjoying the fruits of their labor. Instead of living in the
poorest of neighborhoods on an outer island, they lived in one of the wealthiest
neighborhoods in Honolulu. They did not just look rich on the surface as many of
the people in that neighborhood did. I knew that Mike and his dad were rich
because they allowed me to review their audited financial statements. Not many
people were given that privilege.
My real dad, on the other hand, had just lost his job. He had been climbing the
ladder in the state government when he fell from grace from the political machine
that ran the State of Hawaii. My dad lost everything he had worked to achieve
when he ran against his boss for governor and lost. He had been blacklisted from
state government and was trying to start over. He had no foundation of wealth.
Although he was 52 and I was 25, we were in exactly the same financial position.
We had no money. We both had a college education and we could both get another
job, but when it came to real assets, we had nothing. That night, lying quietly on
my bunk, I knew I had a rare opportunity to choose a direction for my life. I say
rare because very few people have the luxury of comparing the life paths of two
fathers and then choosing the path that was right for them. It was a choice I did not
take lightly.

The Five Phases of Becoming a Sophisticated Investor

Rich dad broke my development program into five distinct phases, which I
have organized into phases, lessons, and chapters. The phases are:
1. Are You Mentally Prepared to Be an Investor?
2. What Type of Investor Do You Want to Become?
3. How Do You Build a Strong Business?
4. Who Is the Sophisticated Investor?
5. Giving It Back.
This book is written as a guide. It will not give you specific answers. The
purpose of this book is to help you understand what questions to ask. And if this
book does that, it has done its job. Rich dad said, “You cannot teach someone to
be a sophisticated investor. But a person can learn to become a sophisticated
investor. It’s like learning to ride a bicycle. I cannot teach you to ride a bicycle,
but you can learn to ride a bicycle. Learning to ride a bicycle requires risk, trial
and error, and proper guidance. The same is true with investing. If you do not want
to take risks, then you’re saying you do not want to learn. And if you do not want
to learn, then I cannot teach you.”
If you’re looking for a book on hot investment tips, or how to get rich quick,
or the secret investment formula of the rich, this book is not for you. This book is
really about learning more than investing. It is written for people who are students
of investing, students who seek their own path to wealth rather than look for the
easy road to wealth.
This book is about rich dad’s five phases of development, the five phases that
he went through and that I am currently going through. If you are a student of great
wealth, you may notice while reading this book that rich dad’s five phases are the
same five phases that the richest business people and investors in the world went
through in order to become very, very rich. Bill Gates, founder of Microsoft;
Warren Buffet, America’s richest investor; and Thomas Edison, founder of
General Electric, all went through these five phases. They are the same five phases
that the young new millionaires and billionaires of the Internet or the “dot com”
generation are currently going through while still in their twenties and thirties. The
only difference is that because of the Information Age, these young people went
through the same phases faster . . . and maybe so can you.
Are You Part of the Revolution?
Great wealth, vast fortunes, and mega-rich families were created during the
Industrial Revolution. The same is going on today during the Information
Revolution.
I find it interesting that today we have self-made multi-millionaires and
billionaires who are twenty, thirty, and forty years of age; yet we still have people
forty and over having a tough time hanging on to $50,000-a-year jobs. One reason
causing this great disparity is the shift from the Industrial Age to the Information
Age.When we shifted into the Industrial Age, people like Henry Ford and Thomas
Edison became billionaires. Today, shifting into the Information Age, we have Bill
Gates, Michael Dell, and the founders of the Internet companies becoming young
millionaires and billionaires. These twenty-somethings will soon be passing Bill
Gates—who is old at 39—in wealth. That is the power of a shift in ages, the shift
from the Industrial Age to the Information Age. It has been said that there is
nothing so powerful as an idea whose time has come . . . and there is nothing so
detrimental than someone who is still thinking old ideas.
For you, this book may be about looking at old ideas and possibly finding new
ideas for wealth. It may also be about a paradigm shift in your life. It may be about
a transition as radical as the shift from the Industrial Age to the Information Age. It
may be about you defining a new financial path for your life. It may be about
thinking more like a businessperson and investor rather than an employee or a
self-employed person.
It took me years to go through the phases, and in fact, I am still going through
them. After reading this book, you may consider going through the same five
phases or you may decide that this developmental path is not for you. If you
decide to embark upon the same path, how fast you choose to go through these
five phases of development is up to you. Remember that this book is not about
getting rich quickly. The choice to undergo such a personal development and
education program begins in phase one . . . the phase of mental preparation.
Are You Mentally Prepared to Be an Investor?
Rich dad often said, “Money will be anything you want it to be.”
What he meant was that money comes from our minds, our thoughts. If a
person says, “Money is hard to get,” it will probably be hard to get. If a person
says, “Oh I’ll never be rich,” or “It’s really hard to get rich,” it will probably be
true for that person. If a person says, “The only way to get rich is to work hard,”
then that person will probably work hard. If the person says, “If I had a lot of
money, I would put it in the bank because I wouldn’t know what to do with it,”
then it will probably happen just that way. You’d be surprised how many people
think and do just that. And if a person says, “Investing is risky,” then it is. As rich
dad said, “Money will be anything you want it to be.”
Rich dad warned me that the mental preparation needed to become a
sophisticated investor was probably similar to the mental preparation it would take
to climb Mt. Everest, or to prepare for the priesthood. He was kidding, yet he was
putting me on notice that such an undertaking was not to be taken lightly. He said
to me, “You start as I did. You start without any money. All you have is hope and
a dream of attaining great wealth. While many people dream of it, only a few
achieve it. Think hard and prepare mentally because you are about to learn to
invest in a way that very few people are allowed to invest. You will see the
investment world from the inside rather than from the outside. There are far easier
paths in life and easier ways to invest. So think it over and be prepared if you
decide this is the path for your life.”

What Should I Invest In?

In 1973, I returned home from my tour of Vietnam. I felt fortunate to have
been assigned to a base in Hawaii near home rather than to a base on the East
Coast. After settling in at the Marine Corps Air Station, I called my friend Mike
and we set up a time to have lunch together with his dad, the man I call my rich
dad. Mike was anxious to show me his new baby and his new home so we agreed
to have lunch at his house the following Saturday. When Mike’s limousine came
to pick me up at the drab gray base BOQ, the Bachelor Officers’ Quarters, I began
to realize how much had changed since we had graduated together from high
school in 1965.
“Welcome home,” Mike said as I walked into the foyer of his beautiful home
with marble floors. Mike was beaming from ear to ear as he held his
seven-month-old son. “Glad you made it back in one piece.”
“So am I,” I replied as I looked past Mike at the shimmering blue Pacific
Ocean, which touched the white sand in front of his home. The home was
spectacular. It was a tropical one-level mansion with all the grace and charm of old
and new Hawaiian living. There were beautiful Persian carpets, tall dark green
potted plants, and a large pool that was surrounded on three sides by his home,
with the ocean on the fourth side. It was very open, breezy, and the model of
gracious island living with the finest of detail. The home fit my fantasies of living
the luxurious life in Hawaii.
“Meet my son James,” said Mike.
“Oh,” I said in a startled voice. My jaw must have been hanging open as I had
slipped into a trance taking in the stunning beauty of this home. “What a cute kid.”
I replied as any person should reply when looking at a new baby. But as I stood
there waving and making faces at a baby blankly staring back at me, my mind was
still in shock at how much had changed in eight years. I was living on a military
base in old barracks, sharing a room with three other messy beer-drinking young
pilots, while Mike was living in a multi-million-dollar estate with his gorgeous
wife and newborn baby.
“Come on in,” Mike continued. “Dad and Connie are waiting for us on the
patio.”
The lunch was spectacular and served by their full-time maid. I sat there
enjoying the meal, the scenery, and the company when I thought about my three
roommates who were probably dining at the officer’s mess hall at that very
moment. Since it was Saturday, lunch on the base was probably a sub sandwich
and a bowl of soup.
After the pleasantries and catching up on old times was over, rich dad said,
“As you can see, Mike has done an excellent job investing the profits from the
business. We have made more money in the last two years than I made in the first
twenty. There is a lot of truth to the statement that the first million is the hardest.”
“So business has been good?” I asked, encouraging further disclosure on how
their fortunes had jumped so radically.
“Business is excellent,” said rich dad. “These new 747s bring so many tourists
from all over the world to Hawaii that business cannot help but keep growing. But
our real success is from our investments more than our business. And Mike is in
charge of the investments.”
“Congratulations,” I said to Mike. “Well done.”
“Thank you,” said Mike. “But I can’t take all the credit. It’s dad’s investment
formula that is really working. I’m just doing exactly what he has been teaching us
about business and investing for all these years.”
“It must be paying off,” I said. “I can’t believe you live here in the richest
neighborhood in the city. Do you remember when we were poor kids, running with
our surfboards between houses trying to get to the beach?”
Mike laughed. “Yes I do. And I remember being chased by all those mean old
rich guys. Now I’m the mean old rich guy who is chasing those kids away. Who
would have ever thought that you and I would be living . . . ?”
Mike suddenly stopped talking once he realized what he was saying. He
realized that while he was living here, I was living on the other side of the island
in drabmilitary barracks.
“I’m sorry,” he said. “I . . . didn’t mean to…”
“No apologies necessary,” I said with a grin. “I’m happy for you. I’m glad
you’re so wealthy and successful. You deserve it because you took the time to
learn to run the business. I’ll be out of the barracks in a couple of years as soon as
my contract with the Marine Corps is done.”
Rich dad, sensing the tension between Mike and me, broke in and said, “And
he’s done a better job than I have. I’m very proud of him. I’m proud of both my
son and his wife. They are a great team and have earned everything they have.
Now that you’re back from the war, it’s your turn Robert.”
May I Invest With You?
“I’d love to invest with you,” I eagerly replied. “I saved nearly $3,000 while I
was in Vietnam and I’d like to invest it before I spend it. Can I invest with you?”
“Well, I’ll give you the name of a good stockbroker,” rich dad said. “I’m sure
he’ll give you some good advice, maybe even a hot tip or two.”
“No, no, no,” I said. “I want to invest in what you are investing in. Come on.
You know how long I’ve known you two. I know you’ve always got something
that you’re working on or investing in. I don’t want to go to a stockbroker. I want
to be in a deal with you guys.”
The room went silent as I waited for rich dad or Mike to respond. The silence
grew into tension.
“Did I say something wrong?” I asked finally.
“No,” said Mike. “Dad and I are investing in a couple of new projects that are
exciting but I think it is best you call one of our stockbrokers first and begin
investing with him.”
Again there was silence, punctuated only by the clinking of the dishes and
glasses as the maid cleared the table. Mike’s wife Connie excused herself and took
the baby to another room.
“I don’t understand,” I said. Turning to rich dad more than Mike, I continued,
“All these years I’ve worked right along side the two of you building your
business. I’ve worked for close to nothing. I went to college as you advised and I
fought for my country as you said a young man should. Now that I’m old enough
and I finally have a few dollars to invest, you seem to hesitate when I say I want to
invest in what you invest in. I don’t understand. Why the cold shoulder—are you
trying to snub me or push me away? Don’t you wantme to get rich like you?”
“It’s not a cold shoulder,” Mike replied. “And we would never snub you or not
wish you to attain great wealth. It’s that things are different now.”
Rich dad nodded his head in slow and silent agreement.
“We’d love to have you invest in what we invest in,” rich dad finally said.
“But it would be against the law.”
“Against the law?” I echoed in loud disbelief. “Are you two doing something
illegal?”
“No, no,” said rich dad with a chuckle. “We would never do anything illegal.
It’s too easy to get rich legally to ever risk going to jail for something illegal.”
“And it is because we want to always remain on the right side of the law that
we say it would be illegal for you to invest with us,” said Mike.
“It’s not illegal for Mike and me to invest in what we invest in. But it would
be illegal for you,” rich dad tried to summarize.
“Why?” I asked.
“Because you’re not rich,” said Mike softly and gently. “What we invest in is
for rich people only.”
Mike’s words went straight through me. Since he was my best friend, I knew
they were difficult words for him to say to me. And although he said them as
gently as possible, they still hurt and cut like a knife through my heart. I was
beginning to sense how wide the financial gap between us was. While his dad and
my dad both started out with nothing, he and his dad had achieved great wealth.
My dad and I were still from the other side of the tracks, as they say. I could sense
that this big house with the lovely white-sand beach was still far away for me, and
the distance was measured in more than miles. Leaning back in my chair and
crossing my arms in introspective thought, I sat there nodding quietly as I
summarized that moment in our lives. We were both 25 years old but in many
ways, Mike was 25 years ahead of me financially.My own dad had just been more
or less fired from his government job and he was starting over with nothing at age
52. I had not even begun.
“Are you OK?” asked rich dad gently.
“Yeah, I’m OK,” I replied, doing my best to hide the hurt that came from
feeling sorry for myself and for my family. “I’m just doing some deep thinking and
some soul searching,” I said, mustering a brave grin.
The room was silent as we listened to the waves and as the cool breeze blew
through the beautiful home. Mike, rich dad, and I sat there while I came to terms
with the message and its reality.
“So I can’t invest with you because I’m not rich,” I finally said as I came out
of my trance. “And if I did invest in what you invest in, it would be against the
law?”
Rich dad and Mike nodded. “In some instances,” Mike added.
“And who made this law?” I asked.
“The federal government,” Mike replied.
“The SEC,” rich dad added.
“The SEC?” I asked. “What is the SEC?”
“The Securities and Exchange Commission,” rich dad responded. “It was
created in the 1930s under the direction of Joseph Kennedy, father of our late
President John Kennedy.”
“Why was it created?” I asked.
Rich dad laughed. “It was created to protect the public from wild unscrupulous
dealmakers, businessmen, brokers, and investors.”
“Why do you laugh?” I asked. “It seems like that would be a good thing to
do.”
“Yes, it is a very good thing,” rich dad replied, still chuckling a little. “Prior to
the stock market crash of 1929, many shady, slippery, and shoddy investments
were being sold to the public. A lot of lying and misinformation was being put
forth. So the SEC was formed to be the watchdog. It is the agency that helps
make—as well as enforce—the rules. It serves a very important role. Without the
SEC, there would be chaos.”
“So why do you laugh?” I persisted.
“Because while it protects the public from the bad investments, it also keeps
the public out of the best investments,” replied rich dad in a more serious tone.
“So if the SEC protects the public from the worst investments and from the
best investments, what does the public invest in?” I asked.
“The sanitized investments,” rich dad replied. “The investments that follow the
guidelines of the SEC.”
“Well, what is wrong with that?” I asked.
“Nothing,” said rich dad. “I think it’s a good idea. We must have rules and
enforce the rules. The SEC does that.”
“But why the chuckle?” I asked. “I’ve known you too many years and I know
you are holding back something that is causing you to laugh.”
“I’ve already told you,” said rich dad. “I chuckle because in protecting the
public from the bad investments, the SEC also protects the public from the best
investments.”
“Which is one of the reasons the rich get richer?” I asked tenuously.
“You got it,” said rich dad. “I chuckle because I see the irony in the big
picture. People invest because they want to get rich. But because they’re not rich,
they’re not allowed to invest in the investments that could make them rich. Only if
you’re rich can you invest in a rich person’s investments. And so the rich get
richer. To me, that is ironic.”
“But why is it done this way?” I asked. “Is it to protect the poor and middle
class from the rich?”
“No, not necessarily,” Mike responded. “I think it is really to protect the poor
and the middle class from themselves.”
“Why do you say that?” I asked.
“Because there are many more bad deals than good deals. If a person is not
aware, all deals—good and bad—look the same. It takes a great deal of education
and experience to sort the more sophisticated investments into good and bad
investments. To be sophisticated means you have the ability to know what makes
one investment good and the others dangerous. And most people simply do not
have that education and experience,” said rich dad. “Mike, why don’t you bring
out the latest deal we are considering?”
Mike left the table for his office and returned with a three-ring binder that was
about two inches thick filled with pages, pictures, figures, andmaps.
“This is an example of something we would consider investing in,” said Mike
as he sat down. “It is known as a non-registered security. This particular
investment is sometimes called a private placement memorandum.”
My mind went numb as Mike flipped though the pages and showed me the
graphs, charts, maps, and pages of written text that described the risks and rewards
of the investment. I felt drowsy as Mike explained what he was looking at and why
he thought it was such a great investment opportunity.
Rich dad, seeing me begin to fade away with the overload of unfamiliar
information, stopped Mike and said, “This is what I wanted Robert to see.”
Rich dad then pointed to a small paragraph at the front of the book that read
“Exemptions from the Securities Act of 1933.”
“This is what I want you to understand,” he said.
I leaned forward to be better able to read the fine print his finger was pointing
to. The fine print said,
“This investment is for accredited investors only. An accredited investor is
generally accepted to be someone who:
has a net worth of $1 million or more; or
has had an annual income of $200,000 or more in each of the most
recent years (or $300,000 jointly with a spouse) and who has a
reasonable expectation of reaching the same income level in the
current year.”
Leaning back in my chair, I said, “This is why you say I cannot invest in what
you invest in. This investment is for rich people only.”
“Or people with high incomes,” said Mike.
“Not only are these guidelines tough, but the minimum amount you can invest
in this investment is $35,000. That is how much each investment ‘unit,’ as it is
called, costs.”
“$35,000!” I said with a gasp. “That is a lot of money and a lot of risk. You
mean that is the least someone can invest in this deal?”
Rich dad nodded. “How much does the government pay you as a Marine
Corps pilot?”
“I was earning about $12,000 a year with flight pay and combat pay in
Vietnam. I really don’t know what my pay will be here now that I am stationed in
Hawaii. I might get some COLA, cost of living allowance, but it sure isn’t going to
be much, and it certainly will not cover the cost of living in Hawaii.”
“So for you to have saved $3,000 was quite an accomplishment,” said rich
dad, doing his best to cheer me up. “You saved nearly 25% of your gross income.”
I nodded yet silently I realized how very, very far behind I was from becoming
a so-called accredited investor. I realized that even if I became a General in the
Marine Corps, I would probably not earn enough money to be considered an
accredited investor. Not even the president of the United States, unless he or she
were already rich, could qualify on salary alone.
“So what should I do?” I finally asked. “Why can’t I just give you my $3,000
and you combine it with your money and we split the profits when the deal pays
off?”
“We could do that,” said rich dad. “But I wouldn’t recommend it. Not for you
anyway.”
“Why?” I asked. “Why not for me?”
“You already have a pretty good financial education foundation. So you can
go way beyond just being an accredited investor. If you want, you could become a
sophisticated investor. Then you will find wealth far beyond your wildest dreams.”
“Accredited investor? Sophisticated investor? What’s the difference?” I asked,
actually feeling a spark of renewed hope.
“Good question,” Mike said with a smile, sensing that his friend was coming
out of a slump.
“An accredited investor is by definition someone who qualifies because he or
she has money. That is why an accredited investor is often called a qualified
investor,” rich dad explained. “But money alone does not qualify you to be a
sophisticated investor.”
“What is the difference?” I asked.
“Well, did you see the headlines in yesterday’s newspaper about the
Hollywood movie star who lost millions in an investment scam?” asked rich dad.
I nodded my head saying, “Yes I did. Not only did he lose millions, he had to
pay the tax department for untaxed income that went into that deal.”
“Well, that is an example of an accredited or qualified investor,” rich dad
continued. “But just because you have money does not mean you’re a
sophisticated investor. This is why we often hear of so many high-income people
such as doctors, lawyers, rock stars, and professional athletes losing money in
less-than-sound investments. They have the money but they lack the
sophistication. They have money but don’t know how to invest it safely and for
high returns. All the deals look the same to them. They can’t tell a good
investment from a bad one. People like them should stay only in sanitized
investments or hire a professional money manager they trust to invest for them.”
“So what is your definition of a sophisticated investor?” I asked.
“A sophisticated investor knows the 3-Es,” said rich dad.
“The 3-Es,” I repeated. “What are the 3-Es?”
Rich dad then turned over the private placement memorandum we were
looking at and wrote the following on the back of one of the pages.
1. Education
2. Experience
3. Excessive cash
“Those are the 3-Es,” he said, looking up from the page. “Achieve those three
items and you will be a sophisticated investor.”
Looking at the three items, I said, “So the movie star had excessive cash, but
he lacked the first two items.”
Rich dad nodded. “And there are many people with the right education but
they lack the experience, and without real life experience, they often lack the
excessive cash.”
“People like that often say, ‘I know’ when you explain things to them, but they
do not do what they know,” added Mike. “Our banker always says, ‘I know’ to
what dad and I do, but for some reason, he does not do what he claims he knows.”
“And that is why your banker lacks the excessive cash,” I said.
Rich dad and Mike nodded.
Again, the room went silent as the conversation ended. All three of us were
deep in our own private thoughts. Rich dad signaled the maid for more coffee and
Mike began putting the three-ring binder away. I sat with my arms crossed, gazing
out upon the deep blue Pacific Ocean at Mike’s beautiful home and contemplating
my next direction in life. I had finished college as my parents had wished, my
military obligation would soon be over, and then I would be free to choose the
path that was best for me.
“What are you thinking about?” asked rich dad, sipping from his fresh cup of
coffee.
“I’m thinking about what I want to become now that I have grown up,” I
replied.
“And what is that?” askedMike.
“I’m thinking that maybe I should become a sophisticated investor,” I replied
quietly. “Whatever that is.”
“That would be a wise choice,” said rich dad. You’ve got a pretty good start, a
financial education foundation. Now it’s time to get some experience.”
“And how will I know when I have enough of both?” I asked.
“When you have excessive cash,” smiled rich dad.
With that, the three of us laughed and raised our water glasses, toasting, “To
excessive cash.”
Rich dad then toasted, “And to being a sophisticated investor.”
“To being a sophisticated investor and to excessive cash,” I repeated again
silently tomyself. I liked the ring of those words in my head.
Mike’s limousine driver was summoned and I returned to my dingy bachelor
officers quarters to think about what I was going to do with the rest of my life. I
was an adult and I had fulfilled my parents’ expectations . . . expectations such as
getting a college education and serving my country during a time of war. It was
now time for me to decide what I wanted to do for myself. The thought of studying
to become a sophisticated investor appealed to me. I could continue my education
with rich dad as I gained the experience I needed. This time, my rich dad would be
guiding me as an adult.
20 Years Later
By 1993, rich dad’s wealth was split between his children, grandchildren, and
their future children. For the next hundred years or so, his heirs would not have to
worry about money. Mike received the primary assets of the business and has done
a magnificent job of growing the balance of rich dad’s financial empire, a financial
empire that rich dad had built from nothing. I had seen it start and grow during my
lifetime.
It took me 20 years to achieve what I thought I should have been able to do in
10 years. There is some truth to that saying, “It’s the first million that is the
hardest.”
In retrospect, making $1 million was not that difficult. It’s keeping the million
and having it work hard for you that I found to be difficult. Nevertheless, I was
able to retire in 1994 at the age of 47, financially free with ample money with
which to enjoy life.
Yet, it was not retirement that I found exciting. It was finally being able to
invest as a sophisticated investor that was exciting. To be able to invest alongside
Mike and rich dad was a goal worth achieving. That day back in 1973, when Mike
and rich dad said I was not rich enough to invest with them, was a turning point in
my life and the day I set the goal to become a sophisticated investor.
The following is a list of some of the investments in which so-called
“Accredited Investors and Sophisticated Investors” invest:
1. Private placements
2. Real estate syndication and limited partnerships
3. Pre-initial public offerings (IPOs)
IPOs (while available to all investors, IPOs are not usually easily
accessible)
4.
5. Sub-prime financing
6. Mergers and acquisitions
7. Loans for startups
8. Hedge funds
For the average investor, these investments are too risky, not because the
investment itself is necessarily risky, but because all too often, the average
investor lacks the education, experience, and excessive capital to know what he or
she is getting into. I now tend to side with the SEC that it is better to protect
unqualified investors by restricting their access to these types of investments
because I made some errors and false steps along the way.
As a sophisticated investor today, I now invest in such ventures. If you know
what you’re doing, the risk is very low while the potential reward can be huge.
Investments such as these are where the rich routinely invest their money.
Although I have taken some losses, the returns on the investments that do well
have been spectacular, far exceeding the few losses. A 35% return on capital is
normal, but returns of 1,000% and more are occasionally achieved. I would rather
invest in these investments because I find them more exciting and more
challenging. It’s not simply a matter of “Buy me 100 shares of this or sell 100
shares of that.” Nor is it “Is the p/e high or is the p/e low?” That is not what being
a sophisticated investor is about. Investing in these investments is about getting
very close to the engine of Capitalism. In fact, some of the investments listed are
venture capital investments, which for the average investor are far too risky. In
reality, the investments are not risky, it’s the lack of education, experience, and
excessive cash that makes the average investor risky.
This Book is not about investments.
This Book is about the investor.
The Path
This book is not necessarily about investments. This book is about the investor
specifically, and the path to becoming a sophisticated investor. It is about you
finding your path to acquiring the 3-Es: education, experience, and excessive cash.
Rich Dad Poor Dad is a book about my educational path as a child.
CASHFLOW Quadrant is Rich Dad Poor Dad part II and is my educational path
as a young adult between the years 1973 and 1994. This book, Rich Dad’s Guide
to Investing, builds on the lessons from all previous years with my real life
experiences and converts the lessons into the 3-E’s in order to qualify as a
sophisticated investor.
In 1973, I barely had $3,000 to invest and I did not have much education and
real-life experience. By 1994, I had become a sophisticated investor.
Over 20 years ago, rich dad said, “Just as there are houses for the rich, the
poor, and the middle class, there are investments for each of them. If you want to
invest in investments that the rich invest in, you have to be more than rich. You
need to become a sophisticated investor, not just a rich person who invests.”