Saturday, December 15, 2012

Robert Kiyosaki: Who Took My Money?

Book review on Robert Kiyosaki: Who Took My Money?

Robert Kiyosaki's book(co-authored with Sharon L. Lechter), 'Who Took My Money?' on "Why slow investors lose and fast money wins" is an interesting read. If you've never heard of Kiyosaki, then you've been living under a rock. He's been on the New York Times Bestseller list multiple times with multiple books.

Although 'Rich Dad Poor Dad' is his most famous book, it's not a favourite of mine. His later books are much better because he becomes a more experienced investor with a better advisory team when he has more money to invest and it's evident in the later books compared to his earlier work. Kiyosaki's book can be annoying to read sometimes because he keeps plugging his own products and boardgame, almost in every single chapter :/

Are Mutual Funds and Managed Funds evil?

Kiyosaki thoroughly dislikes Mutual Funds (for Australian readers, Mutual Funds=Managed Funds, 401(k)=Retirement Funds). He's always denouncing them and telling readers to steer clear of them. I'm not a huge fan of managed funds either. Some are decent (like the index funds with low fees) but the majority has high fees, does not outperform the index (eg All Ords, ASX200) and will charge you fees even if they are losing money hands over fist.

I'm going to highlight the bits that I found interesting or may be of interest to anyone else. 'Who Took My Money'(WTMM) was first published in May 2004, prior to the GFC and mainly reflects on the dotcom sharemarket bust. Ironically, his book is timelessly relevant in light of the GFC crisis that rocked the world in 2008.

 WTMM is structured into two sections: "What Should I Invest In?" and "Ask An Investor".

What Should You Invest In?
Kiyosaki doesn't like diversification in simply the stock market. He recommends 'integrating' and using the powers of the following 'financial forces':

1. Business
2. Real estate
3. Paper assets (shares/stocks)
4. Your banker's money (via leveraging/gearing/mortgage loans/margin loans)
5. Tax laws (via depreciation and the ability to deduct expenses prior to paying tax on profits)
6. Corporate laws (via business entity, copyrights, patents etc)

Whereby, the more you can mix and match those particular 'forces', the more you can accelerate your wealth and returns to create 'financial synergy'.

He refers to life as 'The Game of Money' because we work for approximately 40 years. When you're 25-35yo, you're in the first quarter, 35-45 is second quarter, 45-55 is third quarter and 55-65 is the fourth quarter. After 65, you're in overtime and if you're disabled or have some health impediment, then you're 'out of time'.

Kiyosaki refers to a cash flow quadrant whereby he recommends moving from the 'employee' and 'self employed' side to the 'business owner' and 'investor' side of the quadrants will accelerate your returns. See below:

Employees and self employed individuals will only earn income whilst their personal labour is involved. If you don't work, you don't earn. Simple. On the business owner and investor side, if you don't work, your business and your investments will still generate passive income for you.

The reason why B-I are will help you get richer faster is due to reasons such as utilising OPM(other people's money), choice of operating entity, ability to depreciate your assets against your returns (he refers to depreciation as 'phantom income') and the ability to leverage. Just as the financial institutions use leveraging(on bank deposits) to magnify their returns, you can also use leveraging(from bank/mortgage loans) to magnify your own returns. Savers and depositors earn peanuts on their savings.

The most important aspect of the B-I side which I would also like to emphasise is that you can deduct your expenses against your income prior to paying tax as a business owner and investor. Unfortunately for employees, usually you pay tax first prior to being able to deduct your expenses.

Kiyosaki rather dislikes answering the question, "I have $10k, what should I invest in?". It's a difficult and complex question to answer. Firstly, it depends on your own scenario, how old you are, where you're at in life, what existing debts you have already and where you're at in terms of financial knowledge and experience. If you don't know what to do with your $10k, then the best thing you should do is stash it in a high interest savings account. Go read about investing and then you will have a better idea of what to do with it. Otherwise, you will eventually get fleeced.

He writes that simply putting all your savings into a 'mutual fund/managed fund', dollar cost averaging by monthly contributions, crossing your fingers and praying that the stock market goes up is akin to gambling. There are no guarantees that you won't lose money, there are no insurance company that will insure your stock portfolio against losses. You can insure your stock portfolio but you will need to employ put and call options which are techniques that most average and newbie investors are unable to employ.

He contrasts this against buying investment properties. Insurance companies will insure investment properties because it's a more stable investment but they won't insure your stock portfolio. Using these two examples, he illustrates that the stock market IS riskier than the property market.

"One of the reasons so many investors lose so much money is because they pay $10 a month into a fund for forty years and do not know if it will be there forty years from now."

Maybe Kiyosaki was on the foreclosure ball already back in 2004 when he wrote that, "Today in Phoenix, Arizona, the fastest growing major market in America, foreclosures are up. Many people are losing their homes. Investors are bailing out of properites that they paid too much for."

Unfortunately he was wrong thus far on the Australian property market, "In Australia, interest rates are on the rise again, which will mean the greater fools of the property market will be led to slaughter." Property prices have risen significantly since 2004.

Building pipelines

I once read a quote from Napoleon about investing. He said that investing is like planting trees(or was it fruit trees?). It takes many years, but after several decades, you will have a forest to protect and feed you. I like thinking about investing as planting young fruit trees. The more fruit trees planted and the earlier you plant them, the more fruit you will get as they mature over the years and you will beable to enjoy a whole forest and orchard of trees.

Kiyosaki compares investing to building pipelines. Over the years, you wish to expand the diameter of your pipelines. The goal is to "simply build the pipelines and continuously expand the diameter of the pipe" which is a metafore for increasing the amount of passive income and return that flows from your investment. When you first start, it's a drip and over time as you expand your business and or investments, it becomes a heavier flow of passive income.

This post is becoming insanely long so I'll just quote directly from the book without any of my own personal reflections:

* "one of the most important assets an investor needs to manage is their flow of information. One of the reasons many millions of investors lost trillions of dollars is because they received financial information that was of poor quality, late, often biased, and sometimes dishonest."

* "Waiting for the long term...millions of investors, even while losing a lot of money in the stock market, are still waiting for the market and the price of their shares to come back up. That is a waste of time. Although the market will someday be back, the market that they lost their money in is gone...instead of investing for the long term, they are waiting for the long term..."

* "The professional investor follows the following formula: 
1. Invest money into an asset
2. Get the original investment money back
3. But keep control of the original asset
4. Move the money into a new asset
5. Get the investment money back
6. Repeat the process ...this process is called the velocity of money...most investors do not realise they too can expand their own money supply and thereby expand their earning power"

* "Consider control and how it differs among the different type of asset classes...
Owning your own business - You are in control
Owning real estate - You are in control
401(k)s /retirement funds - Who is in control?
Mutual funds/managed funds - Who is in control?
Equities/stocks - Who is in control? 
... The individual companies have presidents and board of directors who have control over the operation of the underlying business...professional investors want CONTROL over their assets and their cash flow." The ability to control means you can determine how to reduce expenses, how to increase income,  when to pay tax (ie when to sell and trigger CGT tax) and your leveraging ability.

* "Many people just turn their money over to total strangers and wonder why they get such poor returns. Or many people seem to think that it should be easy to find a great investment...The fact is, it's easy to find bad investments. The world is filled with people offering you bad investments to invest in. If you want your money to work hard for you, you cannot afford to be lazy."

* "Four green red hotel...the purpose of business is to make life simpler, not harder. The businesses that make life the easiest are the businesses that make the most money." He employs examples such as cars, phones, supermarket, electric companies etc

* "You should learn to take things that are difficult and make them simple. If you will focus on that, making life easier for people, you will become a very rich person.  The more people you help in making life easier, the richer you will become."

* "The power of power is investing using all three asset classes(business, real estate and paper assets), reinvesting cash flow, leveraged with OPM and accelerated by tax incentives...power investing requires that the investor invest in two, and preferably three, asset classes."

* "...why then do so many more people invest in paper assets and give up so much control? ...the answer...found in the word easy. For millions of people, it is easier to turn over control of their money than to learn how to drive their money. That is why millions of investors have their portfolios filled with mutual funds without any idea of who is driving the fund..."

* Kiyosaki likes paper assets primarily due to their liquidity rather than their long term value. I agree absolutely.

* An employee's cash flow pattern: EARN-->PAY TAX-->THEN SPEND
* A business owner or investor cash flow pattern: EARN-->SPEND--THEN PAY TAX

* "...the five considerations for each investment and how the investment fits into your overall investing strategy:
1. Earn/create- how will it generate cash flow for you?
2. Manage- how will you manage this investment?
3. Leverage- how much leverage will the investment provide, or can you get?
4. Protect- how should you hold the investment, maximise its profitability and protect it from potential creditors?
5. Exit- how will you get your original investment money back?"

That last quote from the book is imo, one of the MOST important part of the investing process. Answering those five points prior to investing will mean you've looked at all the aspects of the cash flow, the potential benefits, protecting your asset and finally, being able to extract your capital so that you can invest in additional assets.

Investing for cash flow is a VERY important concept. If you only invest for capital gains and employ negative gearing as your dominant investment strategy, eventually you will hit a debt servicing capacity wall and be unable to service further investment leveraging due to poor cash flow. 

It's been a long time since I've written a book review and now I remember why I don't post book reviews often lol. PHEW!!  It has been over two years since I've published material regarding personal finance books. The last one I wrote two years ago, 'Top 10 Books on Wealth' is STILL relevant because they're classic books. You should read that post if you like reading personal financial management books.


  1. I was recommended this book when I joined one of network marketing business and a system for it. Although I did not succeed in that business, this book has given me totally different vision to look at how money works.

    When I read this book and then looked at my life and world, it gave me totally different view, you can say it opened my eyes. For example, when I was new, I worked for a dentist who earned millions, paid us few thousands and he did not work by himself, we worked for him. His dental practice was actually his business... !!! I am saying this as successful dentist, but what has been said in this book, and another book, " Cashflow Quadrant " is true all over world and applies more perfectly in India even at this time.

    Rich men need not read this boom as they are groomed in their family. But must read for all those who are not rich.

    Note that, this is not about money making tricks, but it shows you the way to look at your money and life. And this is only basic book to start with.

    1. Maybe once you get enough experience you can open up your own dental practice and hire other dentists to work for you, or open up a dental surgery and have other dentists' rent a room from you for their dental practice. Then yo can be the business owner and even if you go on holiday, the practice will still be creating income for you.