Robert Kiyosaki on stage at a 3-day event teaching about the Other-Poepl's-Money concept

Three ‘Bad’ Things Sophisticated Investors Love

The good, the bad, and the ugly when it comes to debt, expenses, and losses

When it comes to investors and entrepreneurs, one size does not fit all. In fact, there are average investors and there are sophisticated investors. That’s why when people tell me they are an investor or entrepreneur, I want to find out what kind they are. I only want to do business with sophisticated ones.

One way to tell if someone is sophisticated or average is to ask how he uses debt. If someone proudly says they used their own money to start their business, I can safely assume they are an average entrepreneur.

For years, I’ve talked about the concept of Other People’s Money, or OPM. Sophisticated investors and entrepreneurs utilize OPM to fund their business and investment projects. They do not use their own money.

Why is this? Because as long as you have a good, well-structured deal or business, you can make more money using OPM than you can using your own money.

Average entrepreneurs use their own money

A recent study by finance professors Rebel Cole at Florida Atlantic University and Tatyana Sokolyk at Brock University confirms what we’ve taught at Rich Dad all along about OPM.

According to the study, “…researchers pointed out that the small businesses that financed their operations via personal loans—like home equity or personal credit cards—actually reported an average of 57 percent lower revenues after three years.” This is not surprising to me, as again, using your own money to fund a business is the move of an average investor.

Average investors have poor financial knowledge

Usually, I find that average investors and entrepreneurs have limited financial knowledge and education. They were raised to believe that debt was bad, and they do not understand that there can be good debt. They also believe the same thing about expenses and losses.

For instance, an average investor will talk about a company like Amazon and make jokes about how it is not profitable. They are not sophisticated enough to understand that Amazon intentionally takes losses because it is investing in growth. To them, debt, exposes, and losses are “bad” things. But to a sophisticated investor, they can be very good things.

As I wrote a while back, Amazon spends money like a rich person does, that is in a sophisticated way:

Amazon has often been ridiculed for “not being profitable.” By this people meant that they didn’t post positive net income. But as Recode points out, “to know Jeff Bezos’s priorities is to know that he cares more about cash flow than net income.”

…Amazon’s lack of net income isn’t due to poor business practices or a poor business plan. Rather, it’s due to reinvestment of cash into new investments. As Molla and Del Rey write, “But isn’t a business’s goal to turn a profit? Not at Amazon, at least in the traditional sense. Jeff Bezos knows that operating cash flow gives the company the money it needs to invest in all the things that keep it ahead of its competitors, and recover from flops like the Fire Phone. Up and to the right.”

This is no different than how the rich spend their money, constantly acquiring new assets that produce greater cash flow in order to buy more assets. The chart speaks for itself, and as you can see, the growth is exponential.

As a result, Amazon has gone from a $438 million valuation at its IPO in 1997 to a $460 billion valuation today—all without being “profitable”.

To understand this requires a level of sophistication that average investors and entrepreneurs simply do not have.

Good debt, expenses, and losses

The good news is that if you’re an average investor or entrepreneur, you can easily change your ways by investing in financial education. You can start here with some basic knowledge about what makes debt, expenses, and losses good.

As a general rule, good debt, good expenses, and good losses all generate additional cash flow for you.

For instance, debt taken to acquire a rental property that has a positive cash flow each month would be an example of good debt.

Paying for legal and tax advice that save you thousands of dollars in reduced taxes is an example of good expenses.

And an example of a good loss is the loss generated by depreciation in real estate, often called phantom loss, because it is a paper loss and does not require an actual outlay of cash. The end result is that this phantom loss becomes a gain on the tax side.

Bad debt, expenses, and losses

Conversely, bad debt, bad expenses, and bad losses all take money out of your pocket.

Average investors and entrepreneurs hear the words, “debt, expense, and loss,” and react negatively. Their experience does not allow for thinking of these terms in a positive way. Generally, their experiences with debt, expenses, and losses result in additional cash flowing out of their pockets, instead of into their pockets.

When they hear the word debt, they think of things like credit cards, which are used to buy liabilities like new clothes or TVs, and that have very high interest rates. That indeed is bad debt.

When they hear expenses, they think of monthly bills, which they have to work hard to pay month to month, as well as the rising cost of things like medical care. Those indeed are bad expenses.

And when they think of losses, they think of things like their 401k taking a beating in the stock market and watching their retirement funds dwindle. That indeed is a bad loss.

The ugly truth

The ugly truth of all this, however, is that it is often very difficult for the average investor or entrepreneur to make the shift to see debt, expenses, and losses in a positive light—which makes it very difficult for them to invest in a way that makes them truly rich.

So, for instance, when it comes to buying investment real estate, they say things like, “Wouldn’t it be better to pay all cash?” Their fear of debt makes it hard for them to see that using all their own cash is an average way of investing because the return is so much lower. They don’t realize that by leveraging good debt, the Rich Dad fundamental of Other People’s Money (OPM), they have the possibility of a near infinite return.

When it comes to expenses like legal advice and tax accounting consulting, they decide to go the cheap way or do it themselves. They don’t have the ability to see that the potential savings of using quality services and experts can actually make them more than the initial cost.

And because they don’t know enough about the law, they can’t even imagine how a loss could actually be a gain.

Up you financial education

If you want to move from average to sophisticated investing, all it takes is financial education and the desire to open your mind to new possibilities. I’d suggest you start by simply joining the Rich Dad Community, where you can receive free resources and play our financial education game, CASHFLOW at no cost.

The good news (for you) is most people won’t put in the effort required. So, just by taking the next step towards a higher financial IQ, you’ll be light-years ahead of the average investor.

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