Rich Dad’s Guide to Investing

The Introduction
What You Will Learn from Reading this Book
The Securities and Exchange Commission (SEC) of the United States defines
an individual as an Accredited Investor if the individual has:
1. $200,000 or more in annual income or
2. $300,000 or more in annual income as a couple, or
3. $1 million or more in net worth.
The SEC established these requirements to protect the average investor from
some of the worst and most risky investments in the world. The problem is, these
investor requirements also shield the average investor from some of the best
investments in the world, which is one reason why rich dad’s advice to the average
investor was, “Don’t be average.”
Starting with Nothing
This book begins with me returning from Vietnam in 1973. I had less than a
year to go before I was going to be discharged from the Marine Corps. That meant
that in less than a year, I was going to have no job, no money, and no assets. So
this book begins at a point that many of you may recognize and that is a point of
starting with nothing.
Writing this book has been a challenge. I have written and rewritten it four
times. The first draft began at the SEC’s Accredited Investor Level, the level that
begins with a $200,000 minimum annual income. After the book was completed
the first time, it was Sharon Lechter, my co-author, who reminded me of rich dad’s
90/10 rule of money. She said, “While this book is about the investments that the
rich invest in, the reality is less than 10% of the population in America earn more
than $200,000 a year. In fact, I believe it is less than 3% that earns enough to
qualify as an Accredited Investor.” So the challenge of this book was to write
about the investments the rich invest in, investments that begin at the minimum
requirement of $200,000 in earnings and still include all readers regardless if they
have money to invest or not. That was quite a challenge and why it required
writing and rewriting the book four times.
It now begins at the most basic of investor levels and goes to the most
sophisticated investor level. Instead of beginning at the Accredited Investor level,
the book now begins in 1973 because that is when I had no job, no money, and no
assets. A point in life many of us have shared. All I had in 1973 was the dream of
someday being very rich and becoming an investor who qualified to invest in the
investments of the rich. Investments that few people ever hear about, or that are
written about in the financial newspapers, or sold over the counter by investments
brokers. This book begins when I had nothing but a dream and my rich dad’s
guidance to become an investor who could invest in the investments of the rich.
So regardless if you have very little money to invest or have a lot to invest
today, and regardless if you know very little about investing or you know a lot
about investing, this book should be of interest to you. It is written as simply as
possible about a very complex subject. It is written to include anyone interested in
becoming a better informed investor regardless of how muchmoney they have.
If this is your first book on investing, and you are concerned that it might be
too complicated, please do not be concerned. All Sharon and I ask is that you have
a willingness to learn and read this book from the beginning to the end with an
open mind. If there are parts of the book that you do not understand, then just read
the words but continue on to the end. Even if you do not understand everything,
just by reading all the way through to the conclusion of this book, you will know
more about the subject of investing than many people who are currently investing
in the market. In fact, by reading the entire book, you will know a lot more about
investing than many people who are giving investment advice and being paid to
give their investment advice. This book begins with the simple and goes into the
sophisticated without getting too bogged down in detail and complexity. In many
ways, this book starts simple and remains simple although covering some very
sophisticated investor strategies. This is a story of a rich man guiding a young
man, with pictures and diagrams to help explain the often confusing subject of
investing.
The 90/10 Rule of Money
My rich dad appreciated Italian economist, Vilfredo Pareto’s discovery of the
80/20 rule, also known as the Principle of Least Effort. Yet when it came to
money, rich dad was more aware of the 90/10 rule which meant that 10% of the
people always made 90% of the money.
The September 13, 1999, issue of The Wall Street Journal ran an article
supporting my rich dad’s point of view on the 90/10 rule of money. A section of
the article read:
“For all the talk of mutual funds for the masses, of barbers and shoe
shine boys giving investment tips, the stock market has remained the
privilege of a relatively elite group. Only 43.3% of all households owned
any stock in 1997, the most recent year for which data is available,
according to New York University economist Edward Wolf. Of those,
many portfolios were relatively small. Nearly 90% of all shares were held
by the wealthiest 10% of households. The bottom line: That top 10% held
73% of the country’s net worth in 1997, up from 68% in 1983.”
In other words, even though more people are investing today, the rich continue
to get richer. When it comes to stocks, the 90/10 rule of money holds true.
Personally I am concerned because more and more families are counting on
their investments to support them in the future. The problem is that while more
people are investing very few of them are well educated investors. If or when the
market crashes, what will happen to all these new investors? The federal
government of the United States insures our savings from catastrophic loss but it
does not insure our investments. That is why when I ask my rich dad, “What
advice would you give the average investor?” His reply was, “Don’t be average.”
How Not to Be Average
I became very aware of the subject of investing when I was just 12 years old.
Up until that age, the concept of investing was not really in my head. Baseball and
football were on my mind but not investing. I had heard the word, but I had not
really paid much attention to the word until I saw what the power of investing
could do. I remember walking along a small beach with the man I call my rich dad
and his son Mike, my best friend. Rich dad was showing his son and me this piece
of real estate he had just purchased. Although only 12 years old, I did realize that
my rich dad had just purchased one of the most valuable pieces of property in our
town. Even though I was young I knew that oceanfront property with a sandy
beach in front of it was more valuable than property without a beach on it.My first
thought was, “How can Mike’s dad afford such an expensive piece of property?” I
stood there with the waves washing over my bare feet looking at a man the same
age as my real dad, who was making one of the biggest financial investments in his
life. I was in awe of how he could afford such a piece of land. I knew that my dad
made much more money because he was a highly paid government official with a
bigger salary. But I also knew that my real dad could never afford to buy land right
on the ocean. So how could Mike’s dad afford this land when my dad couldn’t?
Little did I know that my career as a professional investor had begun the moment I
realized the power built into the word “investing.”
Some 40 years after that walk on the beach with my rich dad and his son
Mike, I now have people asking me many of the same questions I began asking
that day. In the investment classes I teach, people are now asking me similar
questions. I began asking my rich dad questions such as:
1. “How can I invest when I don’t have any money?”
2. “I have $10,000 to invest. What would you recommend I invest in?”
“Do you recommend investing in real estate, mutual funds, or
stocks?”
3.
4. “Can I buy real estate or stocks without any money?”
5. “Doesn’t it take money to make money?”
6. “Isn’t investing risky?”
7. “How do you get such high returns with low risk?”
8. “Can I invest with you?”
Today more and more people are beginning to realize the power hidden in the
word investing. Many want to find out how to acquire that power for themselves.
After reading this book, it is my intention that many of these questions will be
answered for you and if not answered, it should inspire you to dig further to find
the answers that work for you. Over 40 years ago, the most important thing my
rich dad did for me was spark my curiosity on this subject of investing. My
curiosity was aroused when I realized that my best friend’s dad, a man who made
less money than my real dad, at least when comparing paycheck to paycheck,
could afford to acquire investments that only rich people could afford. I realized
that my rich dad had a power my real dad did not have and I wanted to have that
power also.
Many people are afraid of this power, stay away from it and many even fall
victim to it. Instead of running from the power or condemning it by saying such
things as, “The rich exploit the poor,” or “Investing is risky,” or “I’m not
interested in becoming rich,” I became curious. It is my curiosity and my desire to
acquire this power, also known as knowledge and abilities, that set me off on a life
long path of inquiry and learning.
Investing Like a Rich Person
While this book may not give you all the technical answers you may want, the
intention is to offer you an insight into how many of the richest self-made
individuals made their money and went on to acquire great wealth. Standing on the
beach at the age of 12, looking at my rich dad’s newly acquired piece of real
estate, my mind was opened to a world of possibilities that did not exist in my
home. I realized that it was not money that made my rich dad a rich investor. I
realized that my rich dad had a thinking pattern that was almost exactly opposite
and often contradicted the thinking of my real dad. I realized that I needed to
understand the thinking pattern of my rich dad if I wanted to have the same
financial power he had. I knew that if I thought like him I would be rich forever. I
knew that if I did not think like him, I would never really be rich, regardless of
how much money I had. Rich dad had just invested in one of the most expensive
pieces of land in our town, and he had no money. I realized that wealth was a way
of thinking and not a dollar amount in the bank. It is this thinking pattern of rich
investors that Sharon and I want to deliver to you in this book, and why we
rewrote the book four times.
Rich Dad’s Answer
Standing on the beach 40 years ago, I finally worked up the courage to ask my
rich dad, “How can you afford to buy these 10 acres of very expensive oceanfront
land, when my dad can’t afford it?” Rich dad then put his hand on my shoulder
and gave me an answer I have never forgotten. With his arm draped over my
shoulder, we turned and began walking down the beach at the water line and he
began to warmly explain to me the fundamentals of the way he thought about
money and investing. His answer began with, “I can’t afford this land either. But
my business can.” We walked on the beach for an hour that day, rich dad with his
son on one side and me on his other side. My investor lessons had begun.
A few years ago, I was teaching a three-day investment course in Sydney,
Australia. The first day and a half I spent discussing the ins and outs of building a
business. Finally in frustration, a participant raised his hand and said, “I came to
learn about investing. Why are you spending so much time on business?”
My reply was, “There are two reasons. Reason number one is because what
we ultimately invest in is a business. If you invest in stocks, you are investing in a
business. If you buy a piece of real estate, such as an apartment building, that
building is also a business. If you buy a bond, you are also investing in a business.
In order to be a good investor, you first need to be good at business. Reason
number two is the best way to invest is to have your business buy your
investments for you. The worst way to invest is to invest as an individual. The
average investor knows very little about business and often invests as an
individual. That is why I spend so much time on the subject of business in an
investment course.” And that is why this book will spend some time on how to
build a business as well as how to analyze a business. I will also spend time on
investing through a business because that is how rich dad taught me to invest. As
he said to me 40 years ago, “I can’t afford to buy this land either. But my business
can.” In other words my rich dad’s rule was “My business buys my investments.
Most people are not rich because they invest as individuals and not as owners of
businesses.” In this book, you will see why most of the 10% who own 90% of the
stocks are owners of businesses and invest through their businesses and how you
can do the same.
Later in the course the individual understood why I spent so much time on
business. As the course progressed, that individual and the class began to realize
that the richest investors in the world do not buy investments, most of the 90/10
investors created their own investments. The reason we have billionaires who are
still in their twenties is not because they bought investments. They created
investments, called businesses, that millions of people want to buy.
Nearly every day I hear people say, “I have an idea for a new product that will
make millions.” Unfortunately most of those creative ideas will never be turned
into fortunes. The second half of this book will focus on how the 10% turn their
ideas into multi-million even multi-billion dollar businesses that other investors
invest in. That is why rich dad spent so much time teaching me to build businesses
as well as to analyze businesses to invest in. So if you have an idea that you think
could make you rich, maybe even help you join the 90/10 club, the second half of
this book is for you.
Buy, Hold, and Pray
Over the years rich dad pointed out that investing means different things to
different people. Today I often hear people saying such things as:
“I just bought 500 shares of XYZ company for $5.00 a share, the
price went up to $15.00 and I sold it. I made $5,000 in less than a
week.”
1.
“My husband and I buy old houses, we fix them up and sell them for
a profit.”
2.
3. “I trade commodity futures.”
4. “I have over a million dollars in my retirement account.”
5. “Safe as money in the bank.”
6. “I have a diversified portfolio.”
7. “I’m investing for the long term.”
As rich dad said, “Investing means different things to different people.” While
the above statements reflect different types of investment products and procedures,
rich dad did not invest in the same way. He said instead, “Most people are not
investors. Most people are speculators or gamblers. Most people have the ‘buy,
hold, and pray the price goes up mentality.’ Most investors live in hopes that the
market stays up and live in fear of the market crashing. A true investor makes
money regardless if the market is going up or crashing down; they make money
regardless if they are winning or losing, and they go both long and short. The
average investor does not know how to do that and that is why most investors are
average investors who fall into the 90% that make only 10% of the money.”
More than Buying, Holding and Praying
Investing meant more to rich dad than buying, holding, and praying. This book
will cover such subjects as:
The 10 Investor Controls: Many people say that investing is risky.
Rich dad said, “Investing is not risky. Being out of control is risky.”
This book will go into rich dad’s 10 investor controls that can reduce
risk and increase profits.
1.
The 5 phases of rich dad’s plan to guide me from having no money
to investing with a lot of money. Phase one of rich dad’s plan was
preparing my mind to become a rich investor. This is a simple yet
very important phase for anyone who wants to invest with
confidence.
2.
The different tax laws for different investors. In book number two,
CASHFLOW Quadrant, I cover the four different people found in
the world of business.
They are:
3.
The E stands for employee. The S stands for Self-employed or small
business. The B stands for business owner. The I stands for investor.
The reason rich dad encouraged me to invest from the B quadrant is
because the tax laws are better for investing from the B quadrant.
Rich dad always said, “The tax laws are not fair; they are written for
the rich and by the rich. If you want to be rich, you need to use the
same tax laws the rich use.” One of the reasons why 10% of the
people control most of the wealth is because only 10% know which
tax laws to use.
In 1943, the federal government plugged most tax loopholes for all
employees. In 1986, the federal government took away the tax
loopholes enjoyed by the B quadrant from individuals in the S
quadrant, individuals such as doctors, lawyers, accountants,
engineers, and architects.
In other words, another reason 10% of the investors make 90% of
the money is because only 10% of all investors know how to invest
from the four different quadrants in order to gain different tax
advantages. The average investor often only invests from one
quadrant.
Why and how a true investor will make money regardless if the
market goes up or crashes down.
4.
The difference between Fundamental Investors and Technical
Investors.
5.
In CASHFLOW Quadrant, I went into the six levels of investors.
This book starts at the last two levels of investors and further
classifies them into the following types of investors:
The Accredited Investor
The Qualified Investor
The Sophisticated Investor
The Inside Investor
The Ultimate Investor
By the end of this book, you will know the different skill and
education requirements between each different investor.
6.
Many people say, “When I make a lot of money, my money
problems will be over.” What they fail to realize is that having too
much money is as big a problem as having not enough money. In
this book you will learn the difference between the two kinds of
money problems. One problem is the problem of not enough money.
The other problem is the problem of too much money. Few people
realize how big a problem having too much money can be.
One of the reasons so many people go broke after making a lot of
money, is because they do not know how to handle the problem of
too much money.
In this book you will learn how to start with the problem of having
not enough money, how to make a lot of money and then how to
handle the problem of too much money. In other words, this book
will not only teach you how to make a lot of money but more
importantly it will teach you how to keep it. As rich dad said, “What
7.
good is making a lot of money if you wind up losing it all?”
A stockbroker friend of mine once said to me, “The average investor
does not make money in the market. They do not necessarily lose
money, they just fail to make money. I have seen so many investors
make money one year and give it all back the next year.”
How to make much more than just $200,000, the minimum income
level to begin investing in the investments of the rich. Rich dad said
to me, “Money is just a point of view. How can you be rich if you
think $200,000 is a lot of money? If you want to be a rich investor,
you need to see that $200,000, the minimum dollar amount to
qualify as an accredited investor, is just a drop in the bucket.” And
that is why Phase One of this book is so important.
8.
Phase One of this book, which is preparing yourself mentally to be a
rich investor, has a short mental quiz for you at the end of each
chapter.
Although the quiz questions are simple, they are designed to have
you think andmaybe discuss your answers with the people you love.
It was the soul searching questions my rich dad asked me that helped
me find the answers I was looking for. In other words, many of the
answers I was looking for, regarding the subject of investing, were
really inside of me all along.
9.
What Makes the 90/10 Investor Different?
One of the most important aspects of this book is the mental differences
between the average investor and the 90/10 investor. Rich dad often said, “If you
want to be rich, just find out what everyone else is doing and do exactly the
opposite.” As you read this book you will find out that most of the differences
between the 10% of investors who make 90% of the money and the 90% that make
only 10% of the money is not what they invest in, but that their thinking is
different. For example:
1. Most investors say “Don’t take risks.” The rich investor takes risks.
2. Most investors say “diversify.” The rich investor focuses.
The average investor tries to minimize debt. The rich investor
increases debt in their favor.
3.
The average investor tries to decrease expenses. The rich investor
knows how to increase expenses to make themselves richer.
4.
5. The average investor has a job. The rich investor creates jobs.
The average investor works hard. The rich investor works less and
less to make more and more.
6.
The Other Side of the Coin
So an important aspect of reading this book is to notice when your thoughts
are often 180 degrees out from the guiding thoughts of my rich dad. Rich dad said,
“One of the reasons so few people become rich is because they become set in one
way of thinking. They think there is only one way to think or do something. While
the average investor thinks ‘Play it safe and don’t take risks,’ the rich investor
must also think about how to improve skills so he or she can take more risks.”
Rich dad called this kind of thinking, “Thinking on both sides of the coin.” He
went on to say “The rich investor must have more flexible thinking than the
average investor. For example, while both the average investor and rich investor
must think about safety, the rich investor must also think about how to take more
risks. While the average investor thinks about cutting down debt, the rich investor
is thinking about how to increase debt. While the average investor lives in fear of
market crashes, the rich investor looks forward to market crashes. While this may
sound like a contradiction to the average investor, it is this contradiction that
makes the rich investor rich.”
As you read through this book, be aware of the contradictions in thinking
between average investors and rich investors. As rich dad said, “The rich investor
is very aware that there are two sides to every coin. The average investor sees only
one side. And it is the side the average investor does not see that keeps the average
investor average and the rich investor rich.” The second part of this book is about
the other side of the coin.
Do You Want to Be More than an Average Investor?
This book is much more than just a book about investing, hot tips, and magic
formulas. One of the main purposes for writing it is to offer you the opportunity to
gain a different point of view on the subject of investing. It begins with me
returning from Vietnam in 1973 and preparing myself to begin investing as a rich
investor. In 1973, rich dad began teaching me how to acquire the same financial
power he possessed, a power I first became aware of at the age of 12. While
standing on the sandy beach in front of my rich dad’s latest investment 40 years
ago, I realized that when it came to the subject of investing, the difference between
my rich dad and my poor dad went far deeper than merely how much money each
man had to invest. The difference is first found in a person’s deep desire to be
muchmore than just an average investor. If you have such a desire, then read on.
FREE!
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Readers of Rich Dad’s Guide to Investing Only
As our way of saying thank you for taking an active role in your
financial education, Robert has prepared a special audio report. “My rich
dad said that one of the most important investor skills an investor can
learn is how to get rich when a market is crashing. When everyone else is
panicking and selling, how do you stay calm, stay in the market and make
a lot of money?”
Please listen to
“My Rich Dad Said, ‘Profit Don’t Panic’”
All you have to do to get this audio report is visit our special website
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Thank you and good luck.