As rich dad was talking, I was beginning to understand why the salesperson put such an emphasis on the word "always."
Millions Lose Trillions
As mentioned earlier, between March of 2000 and March of 2003, it is estimated that millions of people lost $7 to $9 trillion in the market crash. Those losses do not include the loss of jobs and the emotional pain that such losses bring with them. Why did so many people lose so much money? While the reasons are many-reasons such as a weakened economy, terrorists, corruption, bad analysis reports, fraud, market trends, and other oversights- one little-known underlying reason is because millions of people mistook a common industry sales pitch for sound financial education. Many always sent their check in, or did not sell . . . investing and holding on for the long term, even as the biggest stock market crash in history was crashing all around them.
The Money Was Not Lost
Michael Lewis is a respected financial writer best known for his bestsellers Liar's Poker, The New New Thing, and Moneyball. He has been the American editor of the British weekly The Spectator and senior editor at The New Republic. He has also been a visiting fellow at the University of California, Berkeley.
In an article written for the October 27, 2002 New York Times Magazine, Lewis states, "Stock market losses are not losses to society. They are transfers from one person to another."
He further describes his own experience in the market. "I should have sensed that the moment I finally decided Internet stocks were a buy is precisely when they became a sell. Instead, I jumped into Exodus Communications at $160 a share and watched it run up a few points-and then collapse.
What happened to my money? It didn't simply vanish. It was pocketed by the person who sold me the shares. The suspects, in order of likelihood: a) some Exodus employee; b) a well-connected mutual fund that got in early at the I.P.O. price; or c) a day trader who bought it at $150."
In other words, between 2000 and 2003, $7 to $9 trillion was not lost . . . $7 to $9 trillion was transferred from one investor to another. Between 2000 and 20003, some investors got richer and other investors got poorer . . . which is why rich dad was more concerned about me, the investor, than what I was investing in.
When Do I Sell?
In 1965, after realizing that rich dad was not happy with my first investment, I asked, "Should I sell those mutual fund shares?" Grinning, he said, "No. I would not sell them just yet. You may have made a mistake but you have not yet learned your lesson. Hang on for a while longer. Keep making those monthly payments until you learn what you need to learn. If you will do that, this lesson will be priceless. If you learn from this event, you will gain something more important than money. You will be on your way to becoming a better investor. One of the first things you need to learn, if you want to be a better investor, is the difference between a sales pitch and sound investment advice."
Investing for the Long Term
Once Christmas vacation 1965 was over, I returned to school in New York. It was tough leaving the warm beaches of Hawaii and stepping back into the coldest part of winter in New York. Instead of surfing I was now shivering. Following rich dad's advice, I continued to send in my check to the mutual fund company once a month. Being in school, the extra money was hard to come by, especially since I had very little financial support from home. I still had expenses and an occasional social life to support. To make up for the shortfall there were many Saturdays I went out into the neighborhood to do odd jobs for $2 an hour. If I worked one or two Saturdays a month, I could afford to send the check in to the mutual fund company as well as pay for the necessities of life, such as fun.
Occasionally, I would open the newspaper to the investment section to find out how my fund was performing. The fund did not do much. It sort of sat at one price and stayed there, just like a sleepy old dog. Once a quarter, I received an envelope from the company with a statement verifying my contributions. After a while I began to dread opening the envelope because I was usually less than impressed with the fund's performance. The number of shares I owned was increasing but the price per share remained about the same. Truthfully I felt kind of stupid for buying such an under-performing investment.
Six months later, I was back in Hawaii, this time for summer vacation 1966. When I stopped by rich dad's office to say hello he invited me out to an early lunch. "How is your mutual fund doing?" he asked once we were seated at the restaurant.
"Well, I put in nearly $100 in six months, but the fund is not doing anything. The shares were about $12 when I first started investing in them and they're still at $12 today."
Rich dad chuckled. "Getting impatient?" "Well, I would like to see a little more action," I replied. "It's not good to be impatient," smiled rich dad. "Patience is important in investing."
"But the fund is not doing anything," I responded. Rich dad laughed out loud after my last comment. He obviously found it funny. "I'm not talking about the fund," he said. "I'm talking about you. You need to learn patience if you want to be an investor." "But I have been patient. My money has been in there for nearly ten months. The price per share remains the same."
"As I said, that is what happens when you are an impatient investor," rich dad said sternly. "Impatient investors often invest hastily-hence their impatience causes them to invest in under-performing investments."
"Under-performing investments . . . just because I invested with impatience?" Rich dad nodded, "How long did you talk to your mutual fund salesperson before you made the decision to invest?"
"We talked for about an hour. He asked me about my goals in life. He showed me a few charts showing me how the Dow Jones Industrial Average was going up and up. He explained the value of investing a little bit of money over a long period of time."
"And you made up your mind and bought the shares," rich dad said with a smile. "Yes," I replied.
"I'd call that impatience." Rich dad chuckled. "You invested impatiently and now you wait impatiently while your investment does nothing. How can you expect to find a great investment if you first of all don't know what a great investment looks like and you're not willing to invest the time to look for the investment? You got what you paid for. Your impatience caused you to find an investment that makes you even more impatient. And always remember this: The worst investments go to impatient investors. Got this lesson?"
"Yes, I have," I replied impatiently. "So am I wasting my money?" I asked. "No," said rich dad strongly. "Right now, don't worry about the money you're making or not making. Right now, you're learning a priceless lesson. Most investors never learn this lesson on impatience. Don't be so impatient. Take time to learn the lesson."
"Okay," I said. "I'll take time to learn this lesson. The next time I make an investment decision, I'll be more patient."
"Good," said rich dad. "Most investors blame the investment rather than themselves. In reality, the real problem is the investor not the investment. And right now you're learning about the price of your impatience. That is a pretty good lesson to start off with-if you learn the lesson." "But I'm a full-time student. I had to concentrate on my studies," I argued. "I didn't have time to learn more and do more research."
"And soon when you graduate and leave school, you will be working full-time. Maybe you'll get married, buy a home, and start raising a family. If that happens, expenses will go up as well as the demands on your time. If you think you're busy as a student, just wait till you're working and married with kids. If you do not make the time to learn to be a better investor now, you will be saying the same things tomorrow as you are today. You'll still be saying 'I didn't have time to learn more and do more research.' Because of your impatience, your laziness, and your lame excuses about not having enough time, you will do the same thing you just did, which is to hand your money over to total strangers and have no idea what they are doing with your money."
Sitting silently, I let rich dad's words sink in. I did not like what he was saying to me. I was getting angry. If only he knew how hard it was to attend a military academy, to carry a full academic load, play sports, and try to have a social life.
"Just admit you're impatient," said rich dad. "Just admit that you are not willing and too busy to invest the time to learn to be an investor. That would be more honest than to just say you're too busy. Then admit that you're not patient enough to find a great investment."
"And if I admit that, then I won't complain about my investment not performing well," I added.
"Or complain when your investment loses money," said rich dad with that smirk of his.
"You mean I can lose money in mutual funds?" I asked. "You can lose money in anything," rich dad replied. "But you know what is worse than losing money?"
"No," I replied, shaking my head. "I don't know. What is worse?" "The worst thing about not learning to be an investor is that you never see great investments," rich dad said matter-of-factly. "If you never invest the time to learn to be an investor you will live in fear of investing, constantly saying 'investing is risky.' By believing that investing is risky, you avoid investing, or you turn your money over to people you hope are investing wisely. But the worst thing is that when you avoid investing, you miss out on the hottest deals in the world. You live in fear rather than live with the excitement of searching for and finding great deals. When you play it safe, living in fear of losing, you miss out on the excitement of winning. You miss out on the excitement of getting richer. That's the worst thing about being impatient and not investing the time to become a real investor."
Thinking for a moment, again letting rich dad's words sink in, I began to recall the sales pitch of the financial advisor who sold me the mutual fund investment plan.
As if reading my mind, rich dad asked me, "Did your salesman friend tell you that the stock market goes up on average 10 percent per year? That's the standard canned sales pitch most salespeople in his business use. Did he tell you something like that?"
"Yes, he did say something like that," I replied. Rich dad roared laughing. "He probably thinks that's a great return. A 10 percent return is peanuts! On top of that, ask him if he will guarantee that tiny return. Of course he won't. He'll just send you a birthday card once a year to say thanks for the business. He wins, you lose. But the biggest loss to you is that you will never see the great investments because you will never become a great investor if you follow his advice of 'Invest for the long term, buy, hold, and diversify.' And on top of all that, while the best investments go to the most educated, the worse and riskiest of all investments go to the least financially educated investors."
"You're saying that mutual funds are the riskiest of all investments?" I asked. "No . . . that is not what I am saying," replied rich dad, now in a frustrated tone. Taking a deep breath and gathering his thoughts, he said, "Listen to me. I'll say it again. I am not talking about the investment. I am talking about the investor. If the investor is uneducated, anything he or she invests in will be risky. They may get lucky now and then, but generally in the long run, any money they make they end up giving most of back to the market. I've seen an uneducated investor take a great real estate investment and turn it into a run-down foreclosure. I've seen an uneducated investor buy a profitable well-run business and soon bankrupt it. I've seen an unsophisticated investor buy shares of stock in a great company, watch that stock climb in value, and fail to sell at the top. After the stock crashes, they hang on to the dead stock. So it's not the investment that is risky . . . it's the investor." I was beginning to understand what rich dad was saying. He was doing his best to get me to see a world very few people see . . . the world of a real investor.
Catching his breath, rich dad continued, "I've also seen a professional investor take over an investment that a bad investor has ruined and make it a good investment again. So the bad investor loses money and the smart investor makes money."
"Are you saying the smart investor never loses money?" I asked. "Of course not," replied rich dad. "We all lose now and then. The point I am making is that a smart investor focuses on becoming a smarter investor. The average investor focuses only on making money. I'm not here to tell you how to run your life. Right now, I want you to stop, take a moment, and think about what you are now learning . . . not how much money you are making or not making. Don't focus on the money. Focus on learning to be a better investor." "So I don't learn much about investing if all I do is write a check, stick it in an envelope, lick a stamp, and drop it in the mail . . . investing for the long term?"
"That is exactly what I am saying. You're not learning to be an investor. You're learning to be a saver and stamp-licker."
Rich dad stood and stretched. I could tell he was tiring of drumming this simple but important lesson into my head. Glancing back at me, he asked, "So what have you learned from your mutual fund investments and about yourself?"
"I've learned I'm impatient. I've learned that I make excuses for not taking the time to learn to invest." "Which causes what?" asked rich dad.
"Which means that I do not always get the best investments. It means I miss out on an exciting world, a world that very few people see. It also means that if I do not make some changes, I am a gambler more than investor." "Good insight," smiled rich dad. "And what else?" Thinking for a while, I could not come up with any more answers. "I don't know what else."
"What about turning your money over to a total stranger?" rich dad replied. "And what about not knowing who this stranger turns your money over to and what these even-more-faceless strangers do with your money? Do you know how much money in fees is being taken out of your money? Do you know how much of your money is actually invested and how much of your money is going into the pockets of the people who manage your money? Is any money coming back into your pockets? What happens if they lose your money? Do you have any recourse? Do you know the answer to any of these questions?" Shaking my head, I replied with a faint, "No."
"Did you ever ask the guy who sold you these mutual funds if he could live off of his own investments or was he living off the commissions from the money you invested with him?"
"No," I replied softly. "I never asked."
Conflict of Interest
When I realized that I may have made a mistake, I wanted to blame Mr. Carling, but I knew better. I was the investor. I made the choice to invest in mutual funds without doing enough due diligence about the investment.
Financial planners make their commissions through selling investments and other financial products (like insurance) to the average investor. We need to learn how to ask the right questions. Like, What are the fees related to this mutual fund? What is your commission from this sale? Rich dad was trying to impress on me that I needed to be in control of my own financial decisions and not give that power over to someone else.
A Slap on the Wrist
In 2002, some of the biggest companies on Wall Street were fined $1.4 billion by New York State Attorney General Eliot Spitzer for fraud and conflicts of interest. In a news conference, Spitzer said, "Every investor knows that the market involves risk. . . . But what every investor expects and deserves is honest investment advice-advice and analysis that is untainted by conflicts of interest." A $1.4 billion fine after $7 to $9 trillion was lost to investors is equivalent to paying a $1.40 fine for causing $7,000 to $9,000 in damages, a mere slap on the wrist-and less than the commissions these big companies earned from the investors who lost the $7 to $9 trillion.
As part of the settlement by which the $1.4 billion fines were levied, reforms were agreed to that establish a set of rules aimed at eliminating conflicts of interest between Wall Street research groups and stock-offering groups. The firms' stock analysts will be barred from being paid for stock research by the firms' investment banking arms.
A Bonus for a Job Well Done
Soon after the slap on the wrist and fine for fraud, The Wall Street Journal ran an article entitled:
"Merrill Lynch Awarded Officers Big '02 Bonuses"
To paraphrase the article: Merrill Lynch & Co. rewarded both its chairman and its chief executive with $7 million in bonuses last year despite the continued stock market rout that has eaten into many of the firm's key businesses. The article continued: During 2002, Merrill reduced its ranks by 6,500 employees, bringing its total job cuts to 21,700 since its employment peaked in 2000.
As I put the newspaper down, I could not help but wonder how a company could award millions of dollars in bonuses to company executives when this very same company had assisted investors in losing trillions of dollars, been charged with fraud, and rather than growing the business, the company's executives had fired nearly 22,000 employees. To be fair and not seem to pick on Merrill Lynch alone, The Wall Street Journal article also posted the annual paychecks of other CEOs from other financial institutions:
Morgan Stanley CEO $11.0 million
Goldman Sachs CEO $12.1 million
Lehman Brothers CEO $12.5 million
Bear Stearns CEO $19.6 million
Some of these companies were also in the group that was fined by the state of New York for fraud.
More Lawsuits Follow
In June and July of 2003, many smaller investors banded together to file lawsuits against Merrill Lynch. The little investors lost even though there was substantial evidence that misrepresentations were made. Although I do not like to see the little investors lose, I tended to agree with the judge's decision that all investors need to be aware when entering the world of investing. In other words, the judge said, "Tough luck."
Mutual Fund Fraud
The New York attorney general turned his attention to the mutual fund industry in early 2003. He stated, "There are undisclosed financial motivations in damn near every transaction involving mutual funds." He is looking into unseen fees charges by the funds and conflicts of interest in the way funds are sold. He is investigating two practices called "late trading" and "market timing." Late trading involves purchasing mutual fund shares at the 4:00 P.M. price after the market closes, allowing the favored investor to take advantage of after-market events not yet reflected in the closing price of the fund. Market timing involves short-term trading of mutual funds, which has a detrimental effect on the long-term shareholders of the mutual fund. While more is being revealed every day during this investigation, the inherent conflicts of interest and insider trading have shaken the average investor's confidence.
Become an Educated Investor
As stated earlier, in the world of investing, money is not lost. It just changes hands. That is why I am hesitant to tell someone what to invest their $10,000 in. If a person does not know what to do with their money, they should first invest some time in their investment education before investing their money. In my opinion, one of the primary reasons why millions of people lost trillions of dollars is because they invested their money but were not willing to invest their time.
So my answer to the question of "I have $10,000. What should I invest it in?" is invest the time learning to be a better investor before investing your money in what you hope and pray is a good investment. Always remember what my rich dad told me years ago. He said, "People without much financial education most often fall for a sales pitch . . . mistaking the sales pitch for advice." Hence, this book is about what my rich dad thought was important for me to invest my time in-seeking real investment education-before I invested my money. Rich dad also said, "The better your investment education the better [the] investment advice you will receive."
Recognizing a sales pitch from good investment advice is the subject of the first chapter of this book because it is a huge distinction that successful investors must learn. Is the advice you are paying for the best advice for you and your investments, or is the advice the best advice to generate more fees for your advisors? The salesman's goal is to make money from you, while the advisor's goal is to make money for you.
Park It or Accelerate It?
Most of the average investor's financial education today comes from financial institutions like banks and salespeople. They are telling the investor to invest, or "park," their money for the long term and to expect the market to increase each year. This advice of "saving for a rainy day" is the right advice for many people.
When you look at the table "Why the Rich Get Richer" in the introduction, the left side is where most people live-with the salesmen. They follow the advice of the financial institutions and salespeople and make the decision to save, or park, their money in the following ways and hope that the market will go up and that these investments will be there for them when they are ready to retire:
- Personal residence
- Mutual funds
- 401(k)s, IRAs, and SEPs
In addition, the most common answer to the question Who Took My Money? is the government, since most people are employees and see their largest expense-taxes-disappear from their paychecks (through withholding) before they get paid.
Rich dad teaches an alternative to the traditional savings and employee mentality. He teaches building or buying assets today that generate cash flow for you today-the method of professional investors. Do you feel trapped working hard for a paycheck? Is it hard to imagine having your money working hard for you? Who Took My Money? will help you make the transition from saver to investor.
Copyright © 2004 by Robert T. Kiyosaki and Sharon L. Lechter.
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