Rich Dad’s Guide to Investing Summary

Rich Dad series have inspired many. It’s because this book gives us a different perspective on money. If you’re born in a middle class family, this series of Rich Dad books are going to be an eye opener for you. Today, I’m going to be providing the summary of “Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!”

When Robert Kiyosaki was 9 years old, he was talking on a beach with his rich dad. When his rich dad showed him a big bungalow and told him, “I just bought it”. Robert was curious as to how can he afford to buy such a big house. This is because his rich dad was actually not that rich then. So he asked his rich dad, how can we afford to buy such an expensive house? This is the answer he got: “I can’t afford it, but my business can”. This is where we learn our first lesson.

Rich Dad’s Guide to Investing:-

1. Increase your Expenses and Lower your Income.

What? You must be wondering, how on earth can someone advise this? We’re always taught to reduce the expenses and increase our income but this is the opposite. That’s true. However, let me explain you the meaning of this statement in detail.

Robert explained the concept of “increasing expense and lowering income” in the final chapters of this book Rich Dad’s guide to Investing. He also said this lesson is the most important lesson in the whole book. The book was written because of this topic, So if you understand this well, you’ve pretty much understood the idea behind this book “Rich Dad’s Guide to Investing”.

When Robert was young, he used to work as an employee for his rich dad. His was paid 10 cents per hour. One day, Robert decided to ask for a raise. However, instead of getting a raise, his rich dad cancelled his complete salary. Why did he do that?

Rich dad’s response: “Giving salary means making them learn to think like an employee”. And Robert’s rich dad didn’t wanted Robert to think like an employee.

How do employees think?

Work hard in your 9 – 5 job, aim for a promotion, get your salary increased, reduce your expenses. So you can save more. However, Robert’s rich dad always advised him to increase expenses and lower your income.

This is because if you’re doing a business, your aim should be to withdraw least possible amount as income and re-invest the rest back to your business. Or acquire assets for business which counts as expense on your tax statement.

Middle-class and salaried people gets their salary which is post-tax (tax is already deducted from their income) and then they think of investing it. Most people do not even invest it in right places. They just keep it in their savings or fixed deposit account which earns 8% or less annually. If they think they’re earning “income” from their investment, then they’re kidding themselves. Average inflation in India of last 40 years is more than 7%. The savings account will always offer interest rate which is at par or less than the inflation in any country.

Successful businesses re-invest their profit either in their own business or acquire other businesses. From Amazon to Berkshire Hathaway, these companies have hardly paid any dividends to its shareholders and their share prices have rocketed since last decades.

So for employees, the best way to decrease income is by maximizing your 401k account or the PF/PPF accounts in India. Moral of the story: The less income you withdraw, the less you have to pay taxes and more that saved money works for you to grow.

What about increasing expenses?

Whenever we talk about expenses, we think of it as bad. We always think to avoid it ‘completely”. Our mind is wired this way if you’re thinking of living frugally and reducing spending. However, only bad expenses should be avoided. And you must clearly know what a good and bad expense is.

But what is a bad expense?

Robert’s tax strategist once told him, “All the millionaires who go broke and become bankrupt made either of these 3 (mistakes) expenses. First, they either buy a jet, big boat or an expensive car. Second, they go on an expensive world tour leaving their business aside. Third, divorced their loyal wife and married someone younger.” All these expenses can be easily controlled.

However, not all the expenses are made to be reduced.

Spending on books, education, seminars and courses are investments, not expenses. The earlier you invest in these areas, the better. The knowledge grows and compounds with time. However, more importantly, the earlier you understand this, the better.

Buying a book worth Rs.500 or $10 is much better than trying to read the free PDF version online. Rich people have small TVs and large libraries. Poor people have large TVs (usually bought on EMIs) and no library.

When Warren Buffet was asked what’s the best investment advice he can make, he responded, “invest in yourself”.

But the reality is many people won’t do it. Because they don’t have enough courage. There’s no courage greater than betting on your own-self.

2. Acquire the 3 E’s

According to Robert, if you really want to become rich then stay rich, you must acquire these 3 E’s. In fact this book Rich Dad’s guide to Investing talks a lot about this 3 things in multiple chapters. Although the author hasn’t gone deep into each subject. But gave enough idea for the readers. The 3 E’s are:

Education, Experience and Excess Cash.

With the help of these 3 E’s, you’ll be able to take advantage of the opportunities available everywhere. But you’re not able to see it because you need that eye. Acquiring these 3 E’s will give you that eye to see things differently.

• Education

We’re not talking about the college degree here. We’re talking about financial knowledge.

People often say, they’ll invest or learn investing when they have enough money in future. But the reality is, when you get more money, you’ll not be able to learn it then. Because most people when they get more money, they handle new money with their same old habit. The mindset doesn’t change overnight. Even if it does, you don’t gain the knowledge overnight. It comes gradually and you have to start it now.

You can see the examples of biggest lottery winners who lose everything and go bankrupt within a decade. Why? Getting more money doesn’t solve the problem. If it solves one problem, it adds two more. It adds up to the list of your problems.

Rich dad is talking about the education and knowledge to start, run and operate a business. Understand how you can generate cashflow from a business and deploy those cash again in the right places. The knowledge and education to read and understand the financial statement of the business.

“Personally, important day of my life was when I learned to read the financial statements of businesses. Because if do any investment without its knowledge, it’s called gambling.”

• Experience

Robert’s rich dad used to give him blank financial statements where he was asked to fill it on his own. He was asked to fill the asset side of the balance sheet then learn from it. He made those statements, showed his rich dad, learned and did it again multiple times. This is because Robert’s rich dad wanted him to get the practical experience as early as possible.

We have many games available on play-store/app-store that you can use to create your imaginary balance sheet. If not, you can also invest a very small portion of your savings to get the real experience before investing huge money. You can attend the annual general meeting (AGM) of any public company by buying just 1 stock. Whether it be a Rs. 350 stock of Marico Industries or Rs. 18,000 stock of 3M Industries, you can be a part owner of that company and attend the AGM just like other wealthy promoters of the business who owns lakhs of shares.

• Excess Cash

You would probably not have to worry about this E much if you focused more on the first two. Excess cash will automatically follow if you have enough knowledge and experience. But when you actually start making money with your own knowledge and experience, you’ll already know where and when to invest for maximum returns and how to protect it from losses.

Usually when we complete our education, we look for “jobs” instead of “opportunities”. We look for “job security” instead of “financial security”. Then all the problems pile up. 

This is why the 10% of population owns more than 90% of the wealth throughout the world. Because the education, experience and excess cash keeps on increasing at compounding rate.

3. Investing is not risky, lack of knowledge is

Robert here advises us to invest as an inside investor. He’s not taking about the illegal insiders investing. Rather, he’s talking about owning the business so that you have maximum knowledge about its operations.

Let me ask you a simple question. How do people become rich? Either by starting their own company or investing in someone else’s company. However, there is one thing that is needed is both the case. That is, patience. Even if you buy the stock of the right company. Let’s say you found the next Facebook or Microsoft, you will probably have to hold it for years before you can start to see a huge profit. However, more than 99% will sell the stock when they see the first sign of it’s price going down.

I have done it for many stocks whose prices are up many fold now. Mukesh Ambani owns 43% of Reliance, Jeff Bezoz owns about 13% of Amazon. These people don’t sell their holdings when they see their stock price going down. In fact, they even more buy when the prices are at the bottom. This is because they know the business from inside and have that amount of confidence in faith that it will do good in the long run.

External investors wouldn’t be able to generate that level of confidence by just reading the reports and watching their interviews. This is betting on your own company is the best strategy. If you ever want to invest in any company, you must do a thorough analysis and build enough confidence to hold it during several market crashes. It is a foolish thing to do to sell the stock in panic during bad times. Only those who don’t have confidence in that business do it. They are losers.

Related: Learn the smart investing strategy during bad times here

Conclusion

If you’ve read the two earlier books by Robert Kiyosaki, namely Rich Dad Poor Dad and Rich Dad’s Cashflow Quadrant, you’ll probably not gain much from this book Rich Dad’s guide to Investing. If you have not read the two books mentioned above, I’d highly recommend starting out with the Rich Dad Poor Dad. This will change the way you think about money and give you a good boost to read about finance and investing.

Although great, but many things are repeated over and over again. It’ll be better to read those two books again. Reading the same books again are a great way of re-learning, it do it many times.

You might not be able to learn a lot on “how to start a business”, or “how and where to invest” from this book. This is one negative point. However, I love the way he sets you up for investing. Many people buy stocks thinking of it as “stock”. Which in reality is a business that they’re buying and becoming a part owner of. Even if they know this, its very hard to develop that mindset. This books does a great job in that.

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