The Problem with Advice
The problem is that all advice is not good advice. Between March 2000 and March of 2003, millions of people lost $7 to $9 trillion in one of the biggest stock market crashes in history, many because they listened to the advice from so-called financial experts. The irony is, most of these financial experts are still handing out advice today and people are still listening to them. During one of the worst stock market crashes in the history of the world, financial experts were advising people to keep their money in the market. Rather than sell, the experts told them to keep buying. . . and many people did keep buying, all the way down to the bottom.
There is an old saying that goes, "When taxi drivers are handing out stock tips, it's time to sell." Maybe that statement should be expanded to include financial advisors.
Voices of Sanity
During the insanity of the boom between 1995 and early 2000, two voices of sanity were Federal Reserve chairman Alan Greenspan and Warren Buffett, reportedly the world's greatest investor. Mr. Greenspan warned of irrational exuberance and Mr. Buffett simply stayed out of the stock market. During the boom and the bust, Warren Buffett's name was often used in reference to smart investing. Financial advisors used his name as the authority figure as to why a person should get into the market. Financial advisors were saying, "Warren Buffett this and Warren Buffett that." When Warren Buffett's name was mentioned, people seemed to put more money into the market. What the advisors failed to tell their faithful investors was that Warren Buffett was not in the stock market.
In an interview in the November 11, 2002, edition of Fortune magazine, entitled "The Oracle of Everything," Mr. Buffett says, "I bought my first stock 60 years ago. Of those 60 years, 50 have been attractive to buy common stocks. In probably 10 years, I've not been able to find anything." One of the reasons he stopped buying stocks is simple. For those ten years, the period between 1992 and 2002, stocks were too expensive. I find it interesting that the world's greatest investor could not find anything to invest in, yet millions of first-time investors and their advisors did.
Criticizing the World's Greatest Investor
The article continues, noting that it was not too long ago, specifically at the height of the boom in early 2000, when many respected financial experts and publications began criticizing Mr. Buffett for not being in the market. One such expert, Harry Newton, publisher of Technology Investor Magazine, wrote, "Warren Buffett should say 'I'm sorry.' How did he miss the silicon, wireless, DSL, cable, and biotech revolutions?" A month later, the technology market collapsed, taking billions of dollars of investor money with it. Who should be saying "I'm sorry" today?
As a person who is often lumped into the group of so-called financial experts, it is important that you be aware of my record. In 2002, I received a phone call from a stockbroker in Baltimore, Maryland. He said, "I just finished reading your third book, Rich Dad's Guide to Investing. I congratulate you for predicting the crash of 2000. I wish I had told my clients to read that book before the market went down." Now, I do not believe I predicted the crash, I simply warned of it. But if you want to read the book, you can decide on the accuracy of my forecast.
The best testament to my record is not found in my record but in the records found in Rich Dad's Success Stories, the records of my readers. This is a book filled with personal stories of everyday people who did well financially, many between 2000 and 2003, the same period millions were losing trillions. So rather than touting my own financial success, which was pretty good during the market crash, my most important results are measured in the success of my readers. If you would like to check my record, please read Rich Dad's Success Stories.
Answer the Question
Good advice is crucial for financial success. There were many times I wish I did have the time to better answer the question "What should I do with $10,000" rather than just say, "Put it in a bank." After years of not answering the question "I have $10,000. What should I invest it in?" I have decided to answer the question in this book, Who Took My Money? The reason I decided to write this book in answer to the question is simply because the question is a very important one.
The Price of Bad Advice
In June of 2003, I was in a taxi heading for the airport. On the radio was a financial expert offering some investment advice, saying, "Now is the time to get back into the stock market."
"Why do you say that?" asked the radio host. "Because all the lights are green," said the financial advisor. "This market is headed straight up." He then went on to his tirade of jargon and standard stock market talk that many of us have heard over and over again, before the crash, during the crash, and now after the crash.
Gazing out the window of the cab, I just tuned out the financial expert until the host took back control of the show. "Okay, let's open up the phone lines and let's hear from any callers who have questions for you." The first caller to get through said, "I'm seventy-eight years old. My wife is seventy-five. In January of 2000 we thought we had a nice safe retirement portfolio. We had about one million dollars in mutual funds."
"That's great," said the host. "Yes-but that was in January of 2000." "How much do you have now?" asked the financial expert. "Well that's the problem," the caller said. "In March of 2000, when the market began to crash, I called my financial planner for advice." "And what did he say?" asked the radio host.
"He said about the same thing your guest is saying now. He said the market was just about to bounce back up . . . it was only a minor correction caused by a little profit taking. He never told us it was a market crash. In fact, he never told us that markets could go down or that mutual funds were not safe. Instead, he advised us to continue to invest for the long term, buy, hold, and diversify." "So what did you do?" asked the host.
"We sat tight. We did as he told us to do. We held on and watched as the market kept falling. As the prices got lower, he even called to tell us to buy more while prices were low." "So did you buy more?"
"We certainly did. But the stock market kept falling and we kept calling him. By August of 2002 he stopped taking our calls. We were later told that he had left the firm and we were turned over to someone else. Anyway, we got sick of opening the envelope from the investment firm. I couldn't stand seeing the money we worked all our lives for disappearing as the market crashed. We aren't working anymore and are wondering what we can do now."
"So how much money do you have left?" the host asked again. "Well, after he stopped taking our calls, we took action and sold our mutual funds. My wife and I thought it was better to keep our money in cash. So after we cashed in our mutual funds, all we had left was about $350,000 and we put it in a CD at the bank."
"That's good," said the host. "At least you have some cash. "Three hundred fifty thousand dollars is nothing to sneeze at, you know."
"Well, the problem is, the certificate of deposit is only paying 1 percent interest per year. One percent of $350,000 is only $3,500 per year. Even with Social Security and Medicare, it's tough to live on that money. I'm afraid we might have to start eating into our savings, and if we do that, we'll be in even worse shape financially. What do you advise?" "Do you have a home?" asked the financial advisor.
"Yes we do," said the caller. "But please don't ask us to sell it. That's all we have left. Besides, it's only worth about $120,000 and we have a mortgage of $80,000 on it. The reason we have a large mortgage is because when interest rates dropped, we refinanced and took out some extra money from the equity in our home."
"And what did you do with money from your home?" asked the radio host. "It's gone. We lived on it. That's why I'm calling for some advice." "Well, what advice would you give to this couple?" the host asked the financial planner.
"Well first of all, you shouldn't have sold your shares," said the financial expert. "As I said the market is coming back." "But it kept going down for years," said the caller. "It's very frightening to lose so much when you're our age."
"Yes, yes, I know," said the expert. "But listen to me now. You should always invest for the long term. Buy and hold on. Keep diversified. Markets do go down but they will come back as they are now."
"So what should he and his wife do now?" asked the radio host. "It's time to get back in. As I said, the market is coming back. Always remember that over the past forty years, the stock market has gone up 9 percent per year, on average."
"You believe now is the time to get back in?" asked the host. "That's right," said the financial expert. "Get back in before you miss the next rally."
"Good advice," said the host to the seventy-eight-year-old man. "Thanks for the call. Next caller, please."
The taxi was now approaching the airport and my blood was boiling. "How can they keep handing out that same old advice . . . and get paid for it? How do they sleep at night?" I muttered to myself as I headed for the gate. As I waited in line to board the plane, I read a headline on a discarded newspaper that screamed, "Investors Pouring Money into Real Estate." Quietly, I shook my head and said to myself, "From one boom and bust to the next boom and bust."
The Same Old Advice
As the plane pulled away from the terminal, I began to recall when I was a first-time investor that knew very little about investing. My mind drifted back to 1965, when at the age of eighteen, I purchased my first shares of mutual funds. I purchased the shares even though I did not really know what a mutual fund was. All I knew was that mutual funds were connected to Wall Street and investing in Wall Street seemed like a cool idea at the time. I was at school in New York, attending the U.S. Merchant Marine Academy, a federal school that trains students to be ship's officers on freighters, tankers, passenger liners, and other ships of commerce. Being a military academy, we were required to wear military uniforms, polish our shoes, and march to class. And being from Hawaii, where all I wore were shorts and T-shirts, I was finding the adjustment to this new life very difficult. It was fall, leaves were turning beautiful colors and falling, and I was getting ready to experience my first winter.
One afternoon, I received a note that a Mr. Carling wanted to see me. I did not know a Mr. Carling, but when you're a plebe, a freshman, you learn to do what you are told and do it promptly, without questioning what you are being asked to do.
"Start investing while you're young," said Mr. Carling's smiling face sitting across the table from me. "And always remember the secret of great investors. The secret is to buy and hold, and invest for the long term. Let your money grow. And always remember to be smart and diversify."
To this advice, I just nodded and said, "Yes, sir." I really did not know what he was talking about, but after four months at the academy, I was well trained in sitting or standing tall and straight and saying "Yes, sir." Mr. Carling was an alumnus of the academy who had stopped sailing ships and had gone into the field of financial planning. He knew what hell we as plebes were going through. He had gone through it himself. Instead of simply saying "Yes, sir" I really should have been questioning how he got on campus, since he was no longer a student or in the merchant marine, and how he got my name. All I knew was that he had contacted me and had set up an appointment to talk to me during study hall and I was saying "Yes, sir" to another authority figure even though he was in a suit and tie, not a military uniform. "How much do I have to invest?" I asked.
"Just $15 a month," the smiling face said. "Fifteen dollars," I said. "Where will I get that kind of money? I'm in school full-time, you know." Remember, this was 1965 and $15 was a lot of money to a college student.
"Be tough," said the smiling Mr. Carling. "The academy will teach you discipline. With that discipline of putting a little bit of money away each month, you'll soon have a sizable nest egg. Remember, always invest for the long term." Even though I agreed with everything he said, I still noted how much he was emphasizing the word always. For some reason, the word and how he said it made me feel just a little uneasy.
Time was precious. I needed to get back to my studies, so I simply agreed to everything he said. After selecting the mutual fund company he recommended I invest in, I signed an agreement to send a check in once a month to purchase more shares. Once the paperwork was completed, I hurried back to my studies and pretty much forgot about the investment plan. Once a month, starting in November of that year, I began to send in my check.
The first six months at the academy were difficult. They were some of the toughest days of my life. I was adjusting to being away from home for the first time, and in New York for the first time . . . my head was shaved and the course load was heavy. On top of that, as plebes we were not allowed off the academy grounds, except for Thanksgiving and now Christmas. As the cold winds of winter whipped across Long Island Sound, I counted the days remaining to Christmas break. I had just enough money left in my savings account to afford the price of a military personnel discount ticket home.
Finally I was back in the warm weather of Hawaii. The first thing I did was join my former high school classmates and go surfing from early in the morning to late into the night. Although my friends were laughing at me for my lack of hair, it was still nice to have this break and to be a kid again. Although I was badly sunburned, my tan was coming back.
A few days into my vacation, I stopped by my rich dad's office with his son, Mike. Mike and I had been surfing and he said his dad wanted to see me. After the usual pleasantries and catching up, I happened to mention to my rich dad that I had made my first investment . . . an investment in a mutual fund. I only mentioned the investment in passing. For me, discussing my mutual fund investment was just idle conversation. But for my rich dad, what I had done required far more than just idle conversation.
"You did what?" he asked. "I invested in a mutual fund," I replied. "Why?" he asked. He did not ask me which fund I had invested in. He only wanted to know why.
Rather than answer, I just stumbled and fumbled with words and thoughts, searching for a logical-sounding answer. "And who did you purchase the shares from?" asked rich dad before I could reply. "Do you know him?"
"Well, yes," I responded assertively and a little defensively. "He is a graduate of the academy. He is an alumnus, class of '58, who has permission to come on campus and sell investments to the midshipmen." Rich dad smirked and asked, "And how did he get your name?" "I don't know. I guess the academy gave it to him."
Again rich dad smirked. Rather than saying anything, he pushed back into his chair, extended his legs, placed his hands in a praying position under his chin, and just sat there searching for the words he wanted to say. Finally, I broke the silence, asking, "Did I do something wrong?"
Again there was just silence for a long ten seconds. "No," rich dad said finally. "First of all I commend you for taking the initiative to invest. Many people wait till it is too late, or never invest for their future. Many people spend everything they make and then expect the company they work for or the government to take care of them when their working days are over. At least you did something-you invested some of your own money."
"But did I do something wrong?" "No-what you did is not really wrong." "So why the concern?" I asked. "Are there better investments?"
"Yes and no. There are always better investments and there are even more bad investments," rich dad said, sitting up straight again. "It's not what you invested in that I am concerned about. Right now I am concerned about you." "Me?" I asked. "What about me?"
"I am concerned about what kind of investor you are becoming more than what investment you have invested in."
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Copyright © 2004 by Robert T. Kiyosaki and Sharon L. Lechter.