Tuesday, January 19, 2010

Books and Lawyers - Rich Dad, Poor Dad

In this earlier post, I discussed the bestselling book "The Millionaire Next Door" and what it might be able to teach lawyers.  "The Millionaire Next Door" was one of the first personal finance books that really helped me improve and shape my financial thinking.  Robert Kiyosaki's "Rich Dad, Poor Dad" (RDPD) was another.  As I will discuss further below, this post should in no way be construed as a blanket recommendation for all of Kiyosaki's products, but RDPD does have a few valuable lessons for lawyers.

RDPD compares the finances and life outcomes of "Rich Dad" who was allegedly the father of one of the author's friends and "Poor Dad" who was the author's own father.  Poor Dad worked for the school board, worked his way up into a political-level position, ran for a state-level political position, lost the race, and found himself blackballed from all political and educational positions.  In his financial life, Poor Dad worked primarily for a salary.  Poor Dad did not do much investing or work on the side and generally had the attitude that his salary would hold him over until he was entitled to a pension and that his pension would last him the rest of his life.  Poor Dad's main "investment" was the house that he lived in.

Conversely, Rich Dad was an entrepreneur who was involved in many real estate deals and seemed to be starting up companies left and right - including house cleaning companies and import/export companies.  Not necessarily anything big at first, but as his wealth grew he began to get into real estate development and hotels.

Rich Dad had a much different view of his money from Poor Dad.  Poor Dad primarily viewed money as something to be spent - sure he would pay the mortgage, but the rest of the money would go to toys, vacations, and other entertainment.  Rich Dad primarily regarded money as something to be invested - not saved, but invested.  To Rich Dad, money's purpose was to make more money for him.  Money that was spent on toys did not make more money for him.  Money that was sitting in a savings account earning 1% was actually losing money because inflation was 3%.

One big difference between RD and PD is in how they view their personal house.  To PD, the house is an "investment" because he bought it for a large sum of money and he hoped to sell it for more money later.  Conversely, for RD, the house was not an investment - it was a liability.  RD reached this conclusion because owning the house as his personal dwelling:
  1. Does not put any cash in his pocket on a monthly basis
  2. Costs him cash every month - including taxes, mortgage, insurance, upkeep, utilities, services, etc.
  3. Really only appreciates at the same rate as inflation - which is inadequate in light of the expenses.  (This point is not very well brought out, but I think it squares with the philosophy in later books).
The book spends a lot of time making the point that a house is a liability, not an investment.  They even use a few charts that can help clarify your thinking about what in your life is an investment as opposed to what is a liability.

A note about the author - Kiyosaki goes overboard making his points and the book's perspective is not balanced.  Further, Kiyosaki's advice can sometimes seem contradictory if taken literally.  For example, Kiyosaki states at one point that the only thing that he considers to be an investment is something that puts money in his pocket at regular intervals - and that everything else is a liabillity.  However, later he talks with pride about his experience when a friend wanted a parcel of land and was willing to pay X - and Kiyosaki went out and found a somewhat larger piece of land that he bought for X.  Kiyosaki split up the land and gave the piece of land of the desired size to his friend at a cost of X.  Thus, Kiyosaki ended up with a piece of land at no cost to himself.  Now, that's great, but owning a piece of land does not square with Kiyosaki's definition of an "investment" because the land will require him to pay taxes, etc., while not putting money in his pocket monthly.

Kiyosaki is also a heavy proponent of real estate - particularly investment real estate - and makes it appear that great deals are to be found everywhere and anywhere.  In this regard, I recognize that Kiyosaki did a lot of investing in Hawaii - it's where he grew up - during the Asian boom - and that Kiyosaki has not been as great a proponent of investment real estate for some time.  Real estate prices vary greatly in their volatility.  They are quite volatile on the costs, but not very volatile at all in the midwest and south.  Many of the huge gains that Kiyosaki seems to suggest are typical are not indicative of the midwest.  I can be pretty confident of this pronouncement because I have owned investment real eastate in this area for several years.

Kiyosaki has also attracted a following that seems to reagrd his word as that of god - which is not conducive to a reasonable discussion of Kiyosaki's pros and cons.  Also, Kiyosaki seems to be making the majority of his money selling books and offering coaching services rather then investing and real estate.  His books often have one or two good points that could be summed up in about 30 pages, but you get the feeling that he wants to sell more books.  Additionally, some of his later books are just re-hashes of the first couple.

That being said, RDPD can be of use to lawyers in helping to gain perspetive on their finances.  For example, if you really fill out the chart as the author recommends and list all of your monthly liabilities and income, it really gets it in your face.  For many lawyers who like to be in the "win" column, this can serve as a wake-up call and a call to action in reducing their liabilities.

Also, by internalizing the thought process of considering any purchase's continuing expenses when determining whether it is an asset or a liability, lawyers can start making better financial decisions.  For example, this can help make it clear that:
  1. That new foreign car is not an "investment".
  2. Time shares are not an investment
  3. Your home is not an investment - and a bigger house = greater monthly liability, not greater "investment" return
  4. You should be investing an assets that produce a positive return for you (at least stocks and bonds) if you ever want to be free of the "rat race" - Kiyosaki's own name for it
As I mentioned, for me personally RDPD was one of the first personal finance books that I read.  RDPD really helped me clarify my thinking between what is an asset and what is a liability and gave me something of a framework for evaluating financial decisions.  For example, I knew that I should save money - but why?  In what way?  How do I know if I am doing it right?  I am not saying the RDPD actually answered these questions for me, but it had a different viewpoint on personal finance that made me think - and helped me to reach my own answers to those questions.

That being said, I definitely took RDPD with a grain of salt - Kiyosaki is very opinionated, sometimes contradictory, and sometimes flat-out wrong.  However, RDPD did make me think as a young attorney - so maybe it can be helpful to you, too.

Here's a link to a review of RDPD on "The Simple Dollar," one of the best personal finance blogs. Here's a link to Kiyosaki's own website.

12 comments:

  1. I have been really interested in personal finance ever since i ran across the book RDPD, but have no idea into how to actually invest into what commodities, whether it is real estate, stocks, and such..

    Besides "The Millionaire Next Door", is there any other books on personal finance that you would recommend to newcomers on personal finance and into investing?

    The RDPD had some good principles that changed my way of thinking for finance and investing but with no prior knowledge of how investing and personal finance works, I feel lost into how to actually utilize the lessons into real practice.

    Also with the current economic conditions, do you see growth in real estate law and bankruptcy?

    Those are two of the areas I was looking into should i choose to go to law school this year.

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  2. 3:47 - I see we had a similar impact with regard to RDPD - it has an impact on how you see things, but it is short on actual plans for implementation. I was going to profile it later, but for my money, the absolute best book on introductory investing is "A Random Walk Down Wall Street" by Burton Malkiel. http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338/ref=sr_1_1?ie=UTF8&s=books&qid=1263938066&sr=8-1

    I don't want to give too many more away right now because it is going to leave me less to write about!

    As far as real estate law - I don't see much growth. Commercial real estate valuations still have not settled down (they are still mostly in survival mode and will be for years) and lenders are squeemish. Consequently, it would be very hard to get new projects off the ground - so the need for lawyers is less. Bankruptcy is a more likely choice.

    Of course, you should realize that with so few areas doing hiring, a large number of law students are going to pitch themselves toward that area - you are going to be looking at a lot of competition for a small number of jobs, even in bankruptcy.

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  3. I've read a couple books in his series and he does a very good job in emphasizing the importance of "financial education" over "formal education." Had I read this early on in my youth, I would not have put so much stock into all these degrees.

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  4. manhattan sleigh rideJanuary 20, 2010 at 7:01 AM

    I disagree a bit about the house. Sure you have to put money into it, but you also get a place to live. And it's very advantaged from a tax perspective.

    It seems likely that many people who live in the suburbs of big cities will be able to have a workable retirement in their early 60s just by selling their houses and moving somewhere cheaper.

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  5. JD Underdog - Kiyosaki certainly does downplay formal education. Sometimes I think he overdoes it, but he definitely delivers his point unequivocally.

    Manhatten Sleigh Ride - You are right - you get a place to live - and you are right that it is advantaged from a tax perspective. However, paying rent also gives you a place to live, but is obviously an expense. Further, a tax-advantaged expense is still an expense/liability. I am tyring to prepare a longer post on this issue, but one thing that people don't necessarily appreciate is that paying the mortgage is actually (in part) a savings plan with a required monthly savings amount - that's the "principle" portion of your mortgage. Consequently, owning a house is kind of like renting plus having to make a mandatory monthly contribution to a savings plan. For example, having a $2000 monthly expens for PITI is kind of like paying $1500 for rent and putting $500 in a savings account every month. Now if someone actually did rent an apartment where the landlord made them save $500/month, would we call the arrangement a liability/expense or an asset? In this regard, we would more clearly be able to parse the different expense and asset portions. Consequently, with regard to a mortgage, maybe we can say more precisely that the cost of owning the house (interest, taxes, insurance, upkeep, etc) is an expense, but by paying in money to equity we are also using our house as a savings vehicle. What do you thing?

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  6. That should be "think" - "what do you think?"

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  7. manhattan sleigh rideJanuary 20, 2010 at 6:51 PM

    "but by paying in money to equity we are also using our house as a savings vehicle. What do you thing?"

    I basically agree. I would add that it also can potentially work as a hedge against inflation.

    Perhaps the best aspect is that the savings aspect is forced. It really takes a lot of discipline to save $500 or $1000 every month. But with a mortgage, it's like you are just paying the rent.

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  8. Some people hate Kiyosaki, and others love him. I look at it this way. Yes, his books are much longer than they need to be, and the writing style can be tedious -- he could boil them all collectively down to a 25 page white paper that would say it all. Yes, he extolls the virtues of buy and hold real estate investing and things that some of us may not be interested in pursuing. Yet, at the end of the day, he provides a great takeaway point about the need to focus on creating income rather than buying a big house and relying on that 401(k) to provide enough money for a comfortable retirement 35 years down the road.

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  9. 12:44 - Yep, that pretty much sums up my thoughts on this book, too.

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  10. I haven't read RDPD nor any of Kiyosaki's other books though my brother-in-law is a huge fan.

    My problem with these types of "you can get rich too" books is that they seem to focus on a few anecdotal rags-to-riches stories while ignoring the larger number of rags-to-rags or middle class-to-rags stories. For every Rich Dad there are probably ten Even Poorer Dads who also tried to be entrepreneurial and lost money. For example, a large number of house flippers who thought they would make a killing investing in real estate lost money.

    It's easy to look down on Poor Dad, but is it possible that Poor Dad saw examples of Even Poorer Dads and Middle Class Dads who lost their shirts trying to become Rich Dad? If becoming Rich Dad were as easy as opening small businesses and investing in real estate and whatnot then everyone would be Rich Dad. Also, most small businesses fail.

    It's only the rare entrepreneurial success stories that make the news, not the more common entrepreneurial failures. Perhaps the real secret is to write and sell get rick quick books.

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  11. Frank - I agree that the book, like most others in the genre, is over-promoting. However, I think that it is useful in that it can help people to stop saying "it's an investment" when they buy an expensive car, an expensive house, or expensive clothes, etc.

    There are certainly many house flippers who lost money. There are also many people who should never have been doing house flipping in the first place. Admittedly - books like this one don't really help you identify whether you would be a good flipper - or help you along the path of identifying a business that you would be good at.

    I certainly agree that a large number of new businesses are no longer in business in 5 years - some of them by design, though. I think that many people go about a new business the wrong way - they put too much into it and get themselves extended. There is an unfortunate attitude that "if I just give this my all, then it HAS to work", but unfortunately that's not how things work. The successful entrepreneurs that I know look for businesses with small startup costs or that they can leverage their existing operations to get going, and they typically don't commit more than 10-15% of their assets to any one venture. They are typically EXTREMELY diversified, but are always willing to listen to ideas that might be worthwhile. They are also typically very concerned about the failure mode or any one business.

    Finally, I have to agree with you in general - many people are not cut out to be entrepreneurs, and they should not force it. People need to find what works for them, and if investing in CDs works for them, then that's great. For others, it might be investing in stocks, or real estate - but maybe the CD investors don't have the skill set or can't sleep at night - and that's not a personal failing, it's just how they are. Also, many people that get into real estate investing want to make a lot of money right away and go for the riskiest deals that long-term participants in the market would avoid (like flipping).

    It's like someone who decides to "invest in the stock market" by only buying penny stocks, which are super-volatile as you know. They then lose their money and go away saying what a bad deal the "stock market" is. Well, sure -if you play it like they did, then it's terrible. However, if you bought solid, blue-chip stocks, or utility stocks, or the SP500, then investing in the stock market is a whole different story.

    Frank - I note your comment about writing books - here's an idea for you that might make money: why not write a book about how regular people come away from books that over-sell and then get into trouble? Don't leave it on a downer, though - point out the specific risks that the books failed to mention, and also point out how the regular person could actually have achieved a good investment.

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  12. Continued -
    For example, someone goes to a seminar, buys a foreclosure, invests in it to fix it up, sells it, but ends up taking a loss. We would then look at the risk of things like 1) undisclosed defects in the property, 2) cash-outlay, 3) cost overruns for materials or trades, 4) market delay, 5) changes in market forces, etc. We then go back and look at the deal or a similar deal and show how the person could have won. For example, should they have ceased bidding at the auction once the price passed a certain point? Should they get experience in the trades thenselves so that they can do their own fix-up?
    etc.

    In terms of entrepreneurial activity, if you chose to write a book like this, it would be a minimal cost outlay of materials and capital (although a lot of time) that might pay off pretty well.

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