Rich Dad’s Guide to Investing – Robert Kiyosaki
Part One - Introduction
Chapter One – What Should I Invest In?:
Accredited Investor Criteria:
1)$200,000 or more in annual income or
2)$300,000 or more in annual income as a couple, or
3)$1 million or more in net worth
Accredited and Sophisticated Investors Invest in:
1)Private placements – selling stocks to individuals
2)Real estate syndication and limited partnerships
3)Pre-initial public offerings (IPOs)
4)IPOs (while available to all investors, IPOs are usually not easily accessible)
5)Sub-prime financing
6)Mergers and acquisitions
7)Loans for startups
8)Hedge funds
5 Phases of Becoming a Sophisticated Investor:
1)Are you mentally prepared to be an investor?
2)What type of investor do you want to become?
3)How do you build a strong business?
4)Who is a sophisticated investor?
5)Giving it back
-There is nothing more powerful than an idea whose time has come
Chapter Two – Pouring a Foundation of Wealth
Part Two – Investor Lessons
Chapter Three – Investor Lesson #1 – The Choice:
Priorities Should Be:
1)To be rich
2)To be comfortable
3)To be secure
Chapter Four – Investor Lesson #2 – What Kind of World Do You See?
-The world has too much money, not too little.
Chapter Five – Investor Lesson #3 – Why Investing is Confusing?
-Don’t be late to the party. Someone who tells you that their stock went from $2 to $35 has already made their money. Don’t take the risk on such speculative ventures.
Chapter Six – Investor Lesson #4 – Investing is a Plan, Not a Product or Procedure:
-Have a plan to get where you want to go financially.
-Meet with financial advisors who can help you with your long term investment plans.
Chapter Seven – Investor Lesson #5 – Are You Planning to Be Rich or Are You Planning To Be Poor?:
-If you want to see a person’s past, present, and future, just listen to his or her words.
-It takes a rich person’s vocabulary to earn more and more money – increase your vocabulary on the subject you want to know more about.
-Learn one new financial word per week.
Chapter Eight – Investor Lesson #6 – Getting Rich is Automatic If You Have a Plan and Stick To It:
-What Works on Wall Street: A Guide to the best performing investment strategies of all time – James P. O’Shaughnessy.
-Interesting Ideas in the book:
- Most investors prefer complex rather than simple formulas (intuition over reality)
- Keeping things simple is the best rule for investing
- Professional institutional investors tend to make the same mistakes that average investors make (emotional)
- The path to achieving investment success is to study long-term results and find a strategy or group of strategies that make sense. Then study on that path. We must look at how strategies, not stocks, perform.
- History repeats itself, yet people want to believe that this time, things will be different
- Look for stocks that have performed well over the longest period of time
- There is a chasm of difference between what we think might work and what really works.
-Find a simple formula as part of my plan and stick to it until my financial goal is reached.
Chapter Nine – Investor Lesson #7 – How Can You Find a Plan that is Right For You?:
Members of financial team may include:
1)Financial planner
2)Banker
3)Accountant
4)Lawyer
5)Broker
6)Bookkeeper
7)Insurance Agent
8)Successful Mentor
Chapter Ten – Investor Lesson #8 – Decide Now What You Want to Be When You Grow Up:
-Ask your financial advisor to help you write a financial plan for lifetime financial security.
-Find another advisor that will help you write a lifetime plan to become financially comfortable.
Chapter Eleven – Investor Lesson #9 – Each Plan Has a Price:
-Time is precious and it has a price.
-You must put in the time to learn how to invest at the rich level.
Chapter Twelve – Investor Lesson #10 – Why Investing Isn’t Risky
-Invest time learning to become an insider
Chapter Thirteen – Investor Lesson #11 –On Which Side of the Table Do You Want to Sit?
-Be on the right side of the quadrant
Chapter Fourteen – Investor Lesson #12 – The Basic Rules of Investing:
-Earned
-Passive
-Portfolio
1)Know what kind of income you’re working for (earned/passive/portfolio).
2)Convert earned income into portfolio income or passive income as efficiently as possible.
3)Keep your earned income secure by purchasing a security you hope converts your earned income into passive income or portfolio income.
4)The investor is really the asset or liability.
5)A true investor is prepared for whatever happens.
6)If you find a good deal, the money will find you or you will find the money.
7)Be able to evaluate risk and reward.
8)The sophisticated investor should have: Education, Experience, and Excessive Cash.
Chapter Fifteen – Investor Lesson #13 – Reduce Risk Through Financial Literacy:
-Learn to read financial statements.
-Keep updated personal financial statements.
Chapter Sixteen – Investor Lesson #14 – Financial Literacy Made Simple:
-Pay close attention to cash flow
-Learn and practice analyzing financial statements
Chapter Seventeen – Investor Lesson #15 – The Magic of Mistakes
Chapter Eighteen – Investor Lesson #16 – What is the Price of Becoming Rich?
Ways to become rich:
1)Marrying for money
2)Being a crook, cheat, or outlaw
3)Through inheritance
4)Winning the lottery
5)Being a movie star, rock star, sports star, or someone outstanding in one field or another.
6)Being greedy
7)Being cheap
8)Being financially smart
Being financially smart means you can tell the difference between:
1)Good debt and bad debt
2)Good losses and bad losses
3)God expenses and bad expenses
4)Tax payments versus tax incentives
5)Corporations you work for versus corporations you own
6)How to build a business, how to fix a business, and how to take a business public
7)The advantages and disadvantages of stocks, bonds, mutual funds, businesses, real estate, and insurance products as well as the different legal structures and when to use each product.
9)You can become rich by begin generous (Build large systems that serve many).
Chapter Nineteen – The 90/10 Riddle:
-How can you create assets in the asset column without buying them with money?
-You must be able to turn great ideas into assets.
-You get rich by creating assets, not buying them.
Part III: What Type of Investor Do You Want to Become?
Chapter Twenty – Solving the 90/10 Riddle:
Why people say “You Can’t Do That”:
1)They say it even if you are doing what they say you cannot do, not because you can’t do it but because they can’t do it.
2)They say, “You can’t do it” because they cannot see what you are doing.
Chapter Twenty-One – Rich Dad’s Categories of Investors:
Ten Investor Controls:
1)The control over yourself.
2)The control over income/expense asset/liabilities ratios.
3)The control over the management of the investment.
4)The control over taxes.
5)The control over when you buy and when you sell.
6)The control over brokerage transactions.
7)The control ETC (entity, timing, and characteristics).
8)The control over the terms and conditions of agreements.
9)The control over access to information.
10)The control over giving it back, philanthropy, redistribution of wealth.
Categories of Investors:
1)Accredited Investor – earns a lot of money and/or has high net worth.
2)Qualified Investors – knows fundamental and technical investing.
3)Sophisticated Investors – understands investing and the law.
4)Inside Investors – creates the investment.
5)Ultimate Investors – becomes the selling shareholder.
Chapter Twenty-Two – The Accredited Investor:
-Allows you to invest in IPOs
Chapter Twenty-Three – Qualified Investor:
-Understands fundamental and technical analysis.
-Is able to hedge a position (get better returns for greater risk)
Chapter Twenty-Four – Sophisticated Investor:
-Knows tax, corporate, and securities law.
-Choose the proper entity for the business.
-Looks for the future indicators, not past (trends vs. P/E)
Chapter Twenty-Five – Inside Investor:
-Small caps (caps $25M) tend to produce greatest returns over time.
Chapter Twenty-Six – Ultimate Investor
Chapter Twenty-Seven – How to Get Rich Quick:
Individual – buys assets with net income, pays taxes on gross income
Company – buys assets with gross income, pays taxes on net income
-The best way for me to become rich is in the B quadrant.
Chapter Twenty-Eight – Keep Your Day Job and Still Become Rich:
-At first, start your business on a part-time basis.
Chapter Twenty-Nine – The Entrepreneurial Spirit:
-You build a business because it’s exciting, challenging, and will require all of you to make it successful.
Phase III – How do you Build a Strong Business?
Chapter Thirty – Why Build a Business?
-Reasons for building a business
1)To provide you with an excessive cashflow
2)To sell it.
Employee – Security
Self-Employed – Trust
Business – Patience
Investor – Control of Emotion
Chapter Thirty-One – The B-I Triangle:
-There must be a spiritual and business mission.
-Dream of having a team of full time accountants and lawyers.
Chapter Thirty-Two – Cash Flow Management:
-One strategy is not to make a purchase if it were not justified by increased sales.
-Delay taking a salary until the business is generating cash flow from sales.
-Invoice customers quickly upon shipment of goods or when services are provided.
-Require payment upfront until credit has been established. Require credit applications to be completed and check references.
-Establish a minimum dollar amount for orders before granting credit.
-Establish late-payment penalties as part of your terms and conditions and enforce them.
-As your business grows, to speed up the receipt of cash, you may want to have your customers pay their bills directly to lockboxes or directly to your bank.
-Make sure you pay your bills promptly, ask for extended payment terms up front.
-Keep your overhead (expenses) to a minimum.
-Have an investment plan for your cash on hand to maximize its earning potential.
-Establish a line of credit wit your bank before you need it.
-Keep an eye on ratios (assets / liabilities > 2:1, liquid assets / current liabilities > 1:1).
-People who record cash receipts on the bank deposits are different form those who post it to the accounts receivable and general ledger.
-Checks should be endorsed immediately “for deposit only”.
-People who sign checks should not prepare the vouchers or record the disbursements and post the accounts payable and general ledger.
-The person who reconciles the bank statement should have no regularly assigned functions related to cash receipts or cash disbursements.
Billing and Accounts Receivable Systems:
-Billing consumers for the orders.
-Receiving payments for the orders and crediting customers for payment (whether cash, check, or credit card).
-Starting the collection process for delinquent receivables.
Customer Service Systems:
-Returns procedure for inventory receiving and customer payment return.
-Responding to customer complaints.
-Replacing defective product or performing other warranty service.
Accounts Payable Systems:
-Purchasing procedures and approvals required.
-Payment process for supplies and inventory.
-Petty cash.
Marketing Systems:
-Creating an overall marketing plan.
-Designing and producing promotional materials.
-Developing general leads and prospects.
-Creating an advertising plan.
-Creating a public relations plan.
-Creating a direct mail plan.
-Developing and maintaining a database.
-Developing and maintaining a web site.
-Analyzing and tracking sales statistics.
Human Resources Systems:
-Hiring procedures and employee agreements.
-Training employees.
-Payroll process and benefit plans.
General Accounting Systems:
-Managing the accounting process with daily, weekly, monthly, quarterly, and annual reports.
-Managing cash with future borrowing needs secured and available.
-Budgeting and forecasting.
-Reporting payroll taxes and withholding payments.
General Corporate Systems:
-Negotiating, drafting, and executing contracts.
-Developing and protecting intellectual property.
-Managing insurance needs and coverage.
-Reporting and paying federal and state or other jurisdictional taxes.
-Planning for federal and state or other jurisdictional taxes.
-Managing and storing records.
-Maintaining investor/shareholder relations.
-Ensuring legal security.
-Planning and managing growth.
Physical Space Management Systems:
-Maintaining and designing telephone and electrical sy6stems.
-Planning permits and fees.
-Licensing.
-Ensuring physical security.
Chapter Thirty-Five – Legal Management:
-It is important to seek legal protection for your intellectual property, only then does it become an asset.
Chapter Thirty-Six – Product Management
Phase IV – Who is a Sophisticated Investor?:
Chapter Thirty-Seven – How a Sophisticated Investor Thinks:
-Always think in terms of financial statements
Chapter Thirty-Eight – Analyzing Investments:
Gross Margin % = (Sales – Costs of Goods Sold) / Sales
Net Operating Margin % = [EBIT (Earnings before interest and tax)] / Sales
Operating Leverage = Contribution / Fixed Costs
Financial Leverage = Total Capital Employed (Debt and Equity) / Shareholder’s Equity
Total Leverage = Operating x Financial Leverages (Keep Under 5)
Debt / Equity Ratio = Total Liabilities / Total Equity (1:1 or below)
Quick Ratio = Liquid Assets / Current Liabilities
Current Ratio = Current Assets / Current Liabilities
Return on Equity = Net Income / Average Shareholder’s Equity
- Consider at least three years of these figures.
Real Estate:
1)Does the property generate a positive cash flow?
2)If yes, have you done your due diligence?
Cash on Cash Return = Positive Net Cash Flow / Down Payment
Due Diligence Checklist:
1)Current rent roster with paid to dates
2)List of security deposits
3)Mortgage payment information
4)Personal property list
5)Floor plans
6)Insurance policy, agent
7)Maintenance, service agreement
8)Tenant information: leases, ledger cards, applications smoke detector forms
9)List of vendors and utility companies, including account number
10)A statement of structural alterations made to the premises
11)Surveys and engineering documents
12)Commission agreements
13)Rental or listing agreements
14)Easement agreements
15)Development plans, including plans and specifications and as built architectural, structural, mechanical, electrical and civil drawings
16)Government permits or zoning restrictions affecting development of property
17)Management contacts
18)Tax bills and property tax statements
19)Utility bills
20)Cash receipts and disbursement journals pertaining to the property
21)Capital expenditure disbursement records pertaining to the property for two years prior to the submission date
22)Financial statements and state and federal tax returns for the property
23)A termite inspection form and content reasonably satisfactory to the buyer
24)All other records and documents in seller’s possession or under seller’s control which would be necessary or helpful to the ownership, operation or maintenance of the property
25)Market surveys or studies of the area
26)Construction budget of actuals
27)Tenant profiles or surveys
28)Work-order files
29)Bank statements for two years showing operating account for property
30)Certificates of occupancy
31)Title abstract
32)Copies of all surviving guarantees and warranties
33)Phase I Environment Audit (if exists) for every investment.
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Chapter Thirty-Nine – The Ultimate Investor
Chapter Forty – Are You the Next Billionaire?
Chapter Forty-One – Why the Rich Go Bankrupt?
-What % of the money going out your expense column winds up back in your income column in the same month?
-They use their expenses to make them poor instead of rich
Phase V – Giving It Back
Chapter Forty-Two – Are You Prepared to Give It Back?
Conclusion: Why it does not take money to make money… anymore.