The following has been excerpted from Robert Kiyosaki and Donald Trump's new book, Why We Want You to Be Rich: Two Men--One Message.
There are three types of investors in the world. They are:
People who do not invest at all expect their family, the company they work for or their government to take care of them once their working days are over.
People who invest not to lose generally invest in what they think are safe investments. This is the vast majority of investors. These people have the saver's mentality when it comes to investing.
People who invest to win are willing to study more, want more control and invest for higher returns.
Interestingly, all three investor types have the potential to become very rich, even those who expect someone else to take care of them. For example, the CEO of Exxon recently retired and was paid nearly half a billion dollars as a going-away present.
There Is a Difference Between Savers and Investors
Many people invest in mutual funds. When I talk about not being a saver, many of them respond, "But I am investing. I have a portfolio of mutual funds. I have a 401(k). I also own stocks and bonds. Isn't that investing?"
I take a step back and explain myself a bit more, "Yes, saving is a form of investing. So when you buy mutual funds or stocks or bonds, you are sort of investing, but it is more from a saver's point of view and a saver's set of values."
Let's look at the passive investor philosophy. Once again, most financial planners will advise you to
Get out of debt
Invest for the long term (primarily in mutual funds)
Putting this in financial planners' language, it often sounds like this. "Work hard. Make sure the company you work for has a matching 401(k) program. Be sure to maximize your contribution. After all, it's tax-free money. If you own a home, pay off that mortgage quickly. If you have credit cards, pay them off. Also, have a balanced portfolio of growth funds, a few small cap funds, some tech funds, a fund for foreign equities, and when you get older, shift into bond funds for steady income. Of course, diversify, diversify and diversify. It's not smart to keep all of your eggs in one basket."
While not exact, I am sure this sales pitch, disguised as financial advice, has a familiar ring to you.
Donald Trump and I are not saying everyone should change and stop doing this. It is good advice for a certain group of people--people who have a saver's philosophy or are passive investors.
In today's environment, I believe it to be the riskiest of all financial advice. To the financially unsophisticated, it sounds like safe and intelligent advice.
Getting back to the difference between a saver and an investor, there is one word that separates them, and that word is leverage. One definition of leverage is the ability to do more with less.
Most savers do not use financial leverage. And you should not use leverage unless you have the financial education or financial training to apply it. But let me explain further. Let's look at this standard advice from the viewpoint of a saver and then an investor.
Let's start with the advice "work hard."
When most people think about the words "work hard," they think only about themselves working hard. There is very little leverage in you working hard. When Donald and I think about working hard, while we both work hard individually, we mostly think about other people working hard for us to help make us rich. That's leverage. It's sometimes known as other people's time.
While I covered saving money in the last chapter, there are a few other points that are worth mentioning.
The problem with saving money is that the current economic system needs debtors, not savers, to expand.
Let me explain with the following diagram, as originally described in Rich Dad Poor Dad:
Take a moment to study this diagram. Your savings are a liability to the bank even though those same savings are an asset to you. On the other hand, your debt is an asset to the bank, but it is your liability.
For our current economic system to keep growing, it needs smart borrowers … people who can borrow money and get richer, not people who borrow money and get poorer. Once again, the 90/10 rule of money applies--10 percent of the borrowers in the world use debt to get richer--90 percent use debt to get poorer.
Donald Trump and I use debt to get richer. Our bankers love us. Our bankers want us to borrow as much money as we can because borrowers make them richer. This is called other people's money (OPM). Donald and I recommend more financial education for you because we want you to be smarter when it comes to the use of debt. If we have more debtors, our nation's economy will grow. If we have more savers, our economy will shrink. If you can understand that debt can be good, and carefully learn to use debt as leverage, you will gain an advantage over most savers.
Get Out of Debt
Most savers think that debt is bad and that paying off the mortgage on their home is smart. And for many people, debt is bad and getting out of debt is smart. Yet, if you are willing to invest some time in your financial education, you can get ahead faster using debt as leverage. But again, I caution you to first invest in your financial education before you invest with debt.
There is good debt and bad debt. The purpose of getting financially smart is to know when to use debt and when not to.
Donald and I love real estate simply because our bankers love to lend us money to buy good real estate--real estate that is well-managed. Of course, there is good real estate and bad real estate.
Savers who invest in mutual funds have a difficult time using leverage, simply because most bankers will not lend money on mutual funds. Why? Apparently bankers think mutual funds are too risky and consider real estate a safer investment.
Just as my poor dad fell behind financially in the early 1970s because he was a saver, millions of people today are falling behind financially for the same reason.
In this economic environment, savers are losers and debtors are winners. You should always be careful when using debt for any reason.
Invest for the Long Term
"Invest in the long term" has many meanings.
Many people invest in mutual funds for the long term. However, mutual funds provide no leverage. As I said earlier, my banker will not lend me millions of dollars to invest in mutual funds, simply because they are too risky. There is also the lack of control (a subject that will be covered later).
One of the differences between mutual funds and hedge funds is leverage. Hedge funds often use borrowed money. Why do they use borrowed money? With borrowed money, you can increase your ROI, your return on investment, if you are a smart investor. In other words, the more of your own money you use, the lower your returns.
There is a time and a place for mutual funds. I invest in them occasionally. But to me, mutual funds are like fast food; it's OK occasionally, but you do not want to make a habit of consuming it.
Diversify, Diversify, Diversify
Warren Buffett, reportedly the world's richest investor, has this to say about diversification: "Diversification is protection against ignorance. (It) makes very little sense if you know what you're doing."
So the question is, whose ignorance are you protecting yourself from? Your ignorance or your financial advisor's ignorance?
Again, there are multiple meanings for the word "diversify." Generally, it means not putting all of your eggs in one basket, which is what Warren Buffett does. To this, I once heard him say, "Keep all your eggs in one basket, but watch the basket closely."
Personally, I do not diversify, at least not in the way the financial planners recommend. I do not buy a lot of different assets. I would rather focus. In fact, the way I get ahead is by focusing, not diversifying.
One of the better definitions I have heard for the word "focus" is using the word as an acronym.
F = Follow
O = One
C = Course
U = Until
S = Successful
This is what I have done. Years ago, I invested in real estate until I was successful. Today, I still invest in real estate. When I wanted to learn about bonds, I invested in them until I was successful. Once I was successful, I decided I did not like the bonds and so do not invest in them anymore. I have successfully taken two companies from startups through IPOs. I made millions and was successful, but decided I did not want to go through that process anymore. Today, I still prefer real estate.
To me, diversification is a defensive posture, so I see very little offensive leverage in diversification.
For most people, diversification is a good strategy only because it protects investors from themselves and from incompetent or unscrupulous advisors.
This traditional financial planning advice of working hard, get out of debt, invest for the long-term and diversify is good for the average investor--the passive investor who simply turns a little bit of money over each month for someone else to manage. It is good advice also for the person who is rich, but rich professionals, pro athletes and rich children with inheritances fall into this group. The key is to find a good financial advisor.
Know, however, that there is very little leverage in following this path--and leverage is the key to great wealth.
Leverage Is the Key
Ever since humans lived in caves, humans have sought leverage. Two of the first forms of leverage were fire and the spear. Fire and the spear gave humans leverage over their harsh environment. When a child was able, the parents would teach the child how to make his or her own fire and to use the spear as protection and for killing animals for food. Years later, the spear was reduced in size and the bow and arrow was developed, a higher form of leverage. Again, one of the definitions of leverage is the ability to do more with less. A bow and arrow is an example of doing more with less … over a spear.
As time went on, humans continued to use their brains to develop more leverage. Learning to ride a horse was a powerful form of leverage. Not only was the horse used for transportation and the tilling of soil for planting crops, the horse also became a powerful force in warfare.
When gunpowder was developed, the ruler who had cannons conquered rulers who did not. Indigenous peoples such as the American Indians, Hawaiians, Maoris of New Zealand, the Aborigines of Australia and many other cultures were conquered by gunpowder.
Only a hundred years ago, the automobile and the airplane replaced the horse. Again, both new forms of leverage were used for peacetime purposes and for warfare. Today, the countries that control the world's supplies of oil have leverage over much of the world.
Radio, television, telephone, this computer I am writing on and the World Wide Web are all forms of leverage. Each new breakthrough adds more wealth and power to those who have the access and the training to use these leveraged tools.
If you want to become rich and not be a victim of global changes, it is important that you develop the greatest lever of all: your mind. If you want to be rich and keep your wealth, your mind--your financial education--is your greatest lever of all.
Donald and I both had the advantage of having rich dads who introduced us to the world of money. But all our rich dads could do was introduce us. We still had to do our part. We still had to study, learn, practice, correct and grow. Just as the father and mother in the cave taught their children to start fire and use a spear, we had rich dads who taught us how to use money and our minds to become rich.
I can hear some of you saying, "But I don't have a rich dad. I wasn't born into money. I don't have a good education." This type of thinking may be the reason why your chances for attaining and, more importantly, keeping great wealth are slim. Your chances may be slim because you are using your greatest asset, your mind, against yourself. You are using your mind to make excuses rather than to make money. Remember, your mind is your greatest lever. But all levers can work in two directions--for good or bad. Just as debt can be used to make you rich, debt can be used to make you poor.
I did not have a great education, nor was I born into a rich family. The one thing I did have was a rich dad who taught me to use my mind to make money … and not to make excuses. Rich dad hated excuses. He used to say, "Excuses are a dime a dozen. That's why unsuccessful people have so many excuses." He would say, "If you cannot control your mind, you cannot control your life." Today, whenever I meet someone who is unhappy, unhealthy and “unwealthy,” I know it is simply because he or she has lost control of his or her mind, the greatest tool given to us by God.
Although Donald and I have money today, we have both experienced financial losses. If we had used our mind to blame other or to make excuses, we would both be poor today.
We Are All Born Rich
So our message to you is the same message we received from our rich dads: "We are all born rich. We all have been given the most powerful lever on earth, our minds … so use your mind for leverage to make you rich rather than to make excuses.
People who do not invest at all
People who invest not to lose
People who invest to win
Look at this advice as a sales pitch: "Turn your money over to me for years, and I will charge you fees for the long term." I call it a sales pitch because "invest for the long term" is like the airlines offering you a frequent-flier program. They want you as a lifetime, loyal, paying customer.
It also means they can charge you fees for the long term. This would be like paying your real estate broker a commission for selling you your house and then paying the broker a residual commission for as long as you occupy the house.
Mutual funds may not perform as well as other investments due to the fees paid for management of the fund. While I do not mind paying fees, I do not like paying fees for sub-par performance.