Unfair Advantage -The Power of Financial Education (28 page)

Another example is McDonald’s. If McDonald’s had remained just a single hamburger store, an S-quadrant operation, no one would have invested in it. Once McDonald’s began expanding into the B quadrant via a franchise system and was listed on the stock exchange, money poured in.

The reason a business sells “shares” is because the more they share, the richer the entrepreneur becomes. An S-quadrant business has a tough time selling shares because the business is too small to share.

In real estate, the same is true. When I was a small real estate investor investing in single-family homes, condos, and small 4-to 30-unit apartment buildings, it was difficult getting loans.

The moment Kim and I began investing in apartment buildings with over 100 units, banks were more willing to lend us much more money. The reason: On 100-unit-plus properties priced in the millions, banks do not finance the investor. They finance the investment. In other words, on properties of over 100 units, banks look more closely at the investment than the investor.

On top of that, bankers would rather lend $10 million than $10,000 since it takes just as much time to lend thousands as it does millions. Remember, bankers love debtors because debtors make the bank rich.

Once bankers are satisfied with our ability to own and manage large apartment houses profitably, banks often line up to offer us money, even during a crisis.

So the question is: Who do Level-5 investors get their money from? The answer is: They get their money from Level-2 and Level-3 investors who save their money in banks and pension plans.

Starting with Nothing

The reason I started this book with the story of Kim and me being homeless is to let readers know that not having any money is not an excuse for not growing smarter, thinking bigger, and becoming richer.

For most of my life, I have never had enough money. If I had let not having money be an excuse, I would never have become a capitalist. This is important, because a true capitalist never has money. That is why they must know how to raise capital and use other people’s money to make a lot of money for a lot of people.

How to Become a Capitalist

My mom and dad wanted me to be successful in the E and S quadrants. My dad suggested I go to school, get my PhD, which he did himself, and work for the government or climb a corporate ladder in the E quadrant. My mom, a registered nurse, wanted me to become a medical doctor in the S quadrant.

My rich dad suggested I become a capitalist. That meant I had to study the skills required for success in the B and I quadrants.

My mom and dad believed in traditional schools such as colleges, law schools, and medical schools. They valued good grades, degrees, and credentials, such as a law degree or a medical license.

My rich dad believed in education, but not the type of education found in traditional schools. Rather than go to school, my rich dad signed up for seminars and courses that improved his business and investing skills. He also took personal-development courses. He was not interested in grades or credentials. He wanted real-life skills that gave him strengths and operational skills in the B and I quadrants.

When I was in high school, my rich dad often flew to Honolulu to attend seminars on entrepreneurship and investing. One day, when I told my poor dad that rich dad was going to a class on sales, my poor dad laughed. He could not understand why anyone would want to learn how to sell, especially if the class hours were not applied as credit to an advanced college degree. My poor dad also looked down upon my rich dad because my rich dad never finished high school.

Having two dads with differing attitudes on education, I was aware that there was more than one type of education. Traditional schools were for those who wanted to be successful in the E and S quadrants, and another type of education was for those who wanted to be successful in the B and I quadrants.

In 1973, I returned from Vietnam. It was time for me to make up my mind about which dad I was going to follow. Was I going to follow in my poor dad’s footsteps and go back to school to become an E or an S, or take my rich dad’s path and become a B or an I, eventually to become a capitalist?

In 1973, my rich dad suggested I take classes on real estate investing. He said, “If you want to be a successful capitalist, you must know how to raise capital and how to use debt to make money.”

That year I took a three-day workshop on real estate investing. It was the start of my education into the world of the capitalist.

A few months later, after looking at over 100 properties, I purchased my first rental property on the island of Maui, using 100 percent debt financing and still putting $25 cash flow in my pocket each month. My real-life education had begun. I was learning to use other people’s money to make money, a skill a true capitalist must know.

In 1974, my contract with the Marine Corps was up, and I took a job with the Xerox Corporation in Hawaii, not because I wanted to climb the corporate ladder, but because Xerox had the best sales-training program. Again, this was all part of my rich dad’s educational program to train me to become a capitalist.

By 1994, Kim and I were financially free, never needing a job or a company or government retirement plan. Rich dad was correct: My education could set me free—but not the education found in traditional schools.

When the markets began to crash in 2007, rather than crash with the rest of the economy, our wealth skyrocketed. As the stock market and real estate markets crashed, great deals floated to the surface, and banks were more than eager to lend us millions of dollars to buy and take over their investments gone bad. In 2010 alone, Kim and I acquired over $87 million in real estate, using loans from banks and pension funds. That year was our best year so far.

As rich dad often said, “If you are a true investor, it does not matter if the markets are going up or coming down. A true investor does well in any market condition.”

Where Are You?

Take a moment and assess where you are today.

Are You at Investor Level 1?

If there is nothing in your asset column with no income coming in from your investments and you have too many liabilities, then you are starting at the bottom level, ground zero.

If you are deeply in bad debt, your best investment might be to get out of bad debt.

There is nothing wrong with being deeply in bad debt, unless you do nothing. After I lost my first business, I was nearly a million dollars in debt. It took me almost five years to reach zero. In many ways, learning from my mistakes and taking responsibility for my mistakes was the best education I could have asked for. If I had not learned from my mistakes, I would not be where I am today.

Kim and I put together a simple program and workbook explaining the process we used to get out of hundreds of thousands of dollars of bad debt. It is a simple, almost painless, process. All it takes is a little discipline and a willingness to learn.

The title of the product is
“How We Got Out of Bad Debt.”
You can purchase it online from RichDad.com.

Are You at Investor Level 2?

If you are a saver, be very careful, especially if you are saving money in a bank or in a retirement plan. In general, savers are losers.

Saving is often a strategy for people who do not want to learn anything. You see, it takes no financial intelligence to save. You can train a monkey to save money.

The risk in saving is that you learn little. And if your savings are wiped out, either by market decline or devaluation of the money supply, you wind up without money and without education.

Remember that the U.S. dollar has lost 95 percent of its value since 1971. It will not take long to lose the rest of its value.

As stated, a person can even lose money saving gold if they buy gold at the wrong price.

I suggest taking a few courses on investing, either in stocks or real estate, and see if anything interests you.

If nothing interests you, then keep saving.

Remember that the bond market is the biggest market in the world simply because most people and businesses are savers, not investors. This may sound strange to savers, but the bond market and banks need borrowers.

Are You at Investor Level 3?

This level is similar to Level 2, except that this level invests in riskier instruments, such as stocks, bonds, mutual funds, insurance, and exchange-traded funds.

Again, the risk with this level is that, if everything is lost, the investor loses everything—and learns nothing.

If you are ready to move out of Level 3, invest in your financial education and take control of your money, then Level 4 is a good level for you.

Are You at Investor Level 4?

If you are here as a professional investor, congratulations. Very few people invest the time to learn and manage their own money. The key to success at Level 4 is lifelong learning, great teachers, great coaches, and like-minded friends.

Level-4 investors take control of their lives, knowing that their mistakes are their opportunities to learn and to grow.

The fear of investing does not frighten them. It challenges them.

Are You at Investor Level 5?

To me, being a capitalist investor at level 5 is like being at the top of the world. Literally, the world is your oyster. The world has no borders. In this world of high-speed technology, it is easier than ever to be a capitalist in a world of plenty.

If you are at this level, keep learning and keep giving. Remember that true capitalists are generous because a B-quadrant capitalist knows you must give more to receive more.

It’s Your Choice

One great thing about freedom is the freedom to choose to live the life you want to live.

In 1973 at the age of 26, I knew I did not want to live my life the way my parents chose to live. I did not want to be living below our means, living paycheck to paycheck, trying to make ends meet. For me, this was not living. It may have been good for them, but I knew in my heart that it was not right for me.

I also knew that going back to school for advanced degrees was not for me. I knew school did not make people rich because I grew up in a family of advanced degrees. Most of my uncles and aunts had masters’ degrees and a few had their doctorates.

I did not want to climb a corporate ladder in the E quadrant either, nor did I want to be a very special specialist in the S quadrant.

So I took the path less traveled and decided to become an entrepreneur and professional investor. I wanted the freedom to travel the world, do business, and invest.

It was my choice. I do not recommend that path to everyone. But I do recommend that a person choose. That is what freedom is: the power to choose.

I encourage you to look at the five levels of investors and make your choice. Each level has its pros and cons, its advantages and disadvantages. Each level has a price greater than money.

If you choose Level 1, 2, or 3, there are many other people and organizations qualified to support your investment life at those levels.

In 1997, Kim and I created The Rich Dad Company to provide educational games, programs, and coaches for those individuals who seek to be Level-4 and Level-5 investors.

A Final Word on Investing

In the world of money, you’ll often see the term ROI, Return On Investment. Depending upon whom you talk to, ROI will vary. For example, if you talk to a banker, he or she may say, “We pay 3 percent interest on your money.” For many people, this may sound good. If you talk to a financial planner, they may say, “You can expect a return on your investment of 10 percent per year.” To many people, a 10 percent return is exciting.

To most people, especially those on the E and S side of the quadrant, the higher your return, the greater the risk. So the person accepting a 10 percent return already assumes there is more risk in that investment than the 3 percent return from the bank. And there is.

Ironically, both the 3 percent return from the bank and the 10 percent return from the stock market are extremely high-risk. The money in the bank is at risk due to inflation and higher taxes caused by banks printing money. The 10 percent in the stock market is at risk due to volatility caused by HFT (high-frequency trading) and due to the novice investor investing without insurance.

In my world, ROI stands for a Return On Information. This means that the more information I have, the higher my returns—and the lower my risk

I caution you, because what I am about to say may sound insane or too good to be true. Yet I assure you, it is true.

In my world, the world of a Level-4 and Level-5 investor, an infinite return is expected—and with low risk. An infinite return means: Money for nothing. In other words, the investor receives income without having any of their own money in the investment.

In an earlier section, I wrote that I took a real estate course in 1973. After looking at over 100 investments, I purchased a condo on Maui using 100 percent financing, which means I used none of my own money. I put $25 each month into my pocket. That $25 was an infinite return on my investment, since I had zero invested. And I quote from that section: “My real-life education had begun. I was learning to use other people’s money to make money, a skill a true capitalist must know.”