Investing lessons for my son. Book#81

I read this book Rich Dad Poor Dad by Robert Kiyosaki last year in June 2016, upon recommendation from someone I met at a conference a few months earlier.

There are a few negative comments on the web about this book. Many categorized it as one of these get-rich-quickly books. I disagree. I found it a relatively simple and good reminder of the mindset that is required to build wealth.

Benjamin Franklin said it all already many years ago in his Poor Richard’s Almanack. The two required personality traits are Frugality and Industry, i.e., live below your means and work hard. Kiyosaki adds for us somewhat this last important part: “and learn to invest your savings”. I think he is right and that’s the whole point of his book that other people may have missed.
The reason is that unlike wages which usually grow linearly, capital if invested correctly, can compound exponentially over time. Therefore an ability to invest can yield, in the long run, exponentially far bigger results for your financial independence than everything else.

So if I had to summarise the book for my son when he reaches the age, and if he wants to achieve financial independence, I would tell him the following:
1. Yes you need to study hard to gain skills with high marketable value.
2. Yes you need to find a good job that earns an attractive income.
3. But don’t forget to live below your means, avoid luxury items and avoid debt so that you can save.
4. And even more important, study in length the field of investing.
The first three steps are necessary but not sufficient. Only step 4 will allow you to achieve this goal, so don’t neglect it.

When investing, what to avoid?
Avoid things with maintenance costs superior to the dividends they generate. For instance, if you own an expensive house in which you live, it will often require repairs and refurbishments. Over time, these might add up to more than your expected increase in the value of the property. If you buy an expensive car, it will cost you every year: insurance, maintenance, repairs; and in a few years, it is likely to be worth only a fraction of what you paid for it. Sooner or later the things you own end up owning you.

When investing, what is best to look for?
Bargains. Buy at attractive prices things that are yielding more dividends than the expenses required to maintain them. For instance, property as an investment if the rental income after tax is superior to the maintenance cost. Or farmland if the crop yield is superior to the expenses associated with it. Or even better a stable business without debt if it generates positive free cash flow and has some small growth prospects.

What attitude do you need to have?
Make an effort and dedicate the time to learn about investing.
Believe that you can do it because too many people don’t even try.
Be curious and be diligent.
Choose your investing heroes carefully.
Surround yourself with smarter people.
Overcome your fear of failure; you will make mistakes and this is part of the journey.
Take risks with positive asymmetry, i.e., situations where “Heads you win, Tails you don’t lose much.”

Thank you M. for recommending this book.

My purpose in life is independence, fulfillment and a better understanding of how the world works. Like Charlie Munger, I believe in the discipline of mastering the best that other people have ever figured out. And like Sir Isaac Newton, I believe in our ability to see further than any others before us by acknowledging that we are standing on the shoulders of giants. With this blog, I hope to keep track of my learning about investing, business, decision making, entrepreneurship, and self-development while inspiring others to do the same. For the moment the format of this blog will be one post for each book that has influenced me, but I expect it to evolve over time. This is book number 81 of my journey. Join me now. John.