John T. Reed' analysis of Robert T. Kiyosaki' book Rich Dad, Poor Dad 4 The making of a financial genius There are probably many ways to became a financial genius, but Kiyosaki has certainly chosen an unlikely route: "¢ flunked sophomore year of high school and had to repeat "¢ U.S. Merchant Marine Academy "¢ 3rd mate oil tanker (or was it "Love Boat" type cruise ship?) "¢ Marine helicopter pilot (or was it fighters?) "¢ refused to return to ship when it was ordered to return to combat (or just missed the boat) "¢ Xerox salesman "¢ failed businessman (nylon surfer wallets) "¢ failed businessman (rock and roll memorabilia) "¢ failed author (1993 book If You Want to Be Rich & Happy, Don"t Go To School?) "¢ failed MBA student "¢ homeless person "¢ bankruptcy (or maybe not) Kiyosaki tries to make a virtue from all his failures and false starts"”saying that' how you learn and you have to get back up and all that. Fine. But couldn"t we see a little more actual success after all these great lessons were learned before we "run away to join your circus?" And how did all this screwed-up stuff happen to a guy who had the benefit of "Rich Dad'" brilliant wisdom back at age nine? If "Rich Dad" is really a completely phony story, how much of this other stuff can we believe? What is his background really? I am impressed by Xerox salesmen as a general rule, but that aspect of his background sure stands out from the rest. Did he really do that? He claims he was a "top-five" guy at Xerox"”one of the nation' most well-managed companies at the time. Really? And this after being something like a bottom-five guy everywhere else! College grad? I was so skeptical that a college graduate could have written this book that I took the unusual step of calling his college to confirm that he really attended and graduated. He did. If I were a Merchant Marine Academy graduate, I would request that they do a recount of Kiyosaki' college grades. This book is an embarrassment to the U.S. Merchant Marine Academy and its midshipmen and alumni. I have been disappointed by the response from USMMA people to this analysis. Two contacted me nit picking my facts about their alma mater. An entering freshman was "deeply offended" and claimed to have "rejected" Annapolis by withdrawing her application there. [The way you truly reject a major service academy is by receiving a fat acceptance envelope and sending in the little "no thanks" RSVP card. The only reason to withdraw your application before it has been acted upon is to avoid the embarrassment of being rejected.] None of the three expressed the slightest displeasure with Kiyosaki' many dishonest statements. Only one USMMA grad wrote in support of my analysis, although they no doubt have a number of accountants, attorneys, and stock brokers among them. One allowed that Kiyosaki' book was possibly "oversimplified." The one who supported my analysis did not answer my request to quote him by name. I received a supportive email from a current midshipman there. But he also told me Kiyosaki made a speech there around the beginning of 2003. That' unfortunate. It proves my point that USMMA is apparently so starved for attention that they will take it any
way they have to get it. I would have expected an expression of embarrassment from them about Kiyosaki' book. The fact that Kiyosaki graduated from USMMA and the defensive response from the three has lowered my previously high opinion of that school by a couple of notches. All colleges graduate the occasional mistake. Harvard Medical School produced Dr. Andrew Weil. But quality colleges do not remain silent when one of their mistakes achieves prominence in a way that conflicts with what they teach. I understand some Harvard Medical School people have denounced Dr. Weil' teachings. I would not have even mentioned where Kiyosaki went to college had it not been for his international business bull. But now I am increasingly disturbed by the response of the USMMA community. With each passing month that they silently accept the attention that Kiyosaki brings them with his outrageous book, they, as a group, implicitly accept its contents as representing what they are about. I have heard from two USMMA guys who generally agreed with my analysis. One noted that USMMA grads have an obligation to stay in the merchant marine for a certain amount of time, because taxpayers pay for their education, but that serving in the military either reduces or eliminates the remainder of that obligation. Maybe getting rid of that obligation, not "learning how to lead men," was Kiyosaki' real motive for joining the Marines. Archie Bunker on Wealth Archie Bunker on Wealth would be a more accurate title. The overall high-school-dropout tone of the book is likely the influence of "rich dad." To be sure, "rich dad" is street smart and has entrepreneur' genes and energy. But like most high-school dropouts, "rich dad" has not done his homework on many of the opinions he passed on to Kiyosaki. For example, Kiyosaki says, "Prices go up because of greed and fear caused by ignorance." In fact, prices are determined by supply and demand, as anyone who is reasonably well read knows. Real estate expert? On pages 106 and 107, he brags of taking back $190,000 worth of 30-year notes at 10%. Competent note investors would never agree to such long terms. One expert I consulted called it a "nutty note." I asked Bill Mencarow, owner of Paper Source if he knows of any note investors who routinely take back 30-year notes. He said, "To paraphrase Eisenhower speaking about Nixon' vice-presidential accomplishments, give me a week and I might think of one." Mencarow further states that 30-year self-amortizing notes, at best, would sell at about a 50% discount for cash. He actually asked around for me and found three guys who would pay only $90,000 to $120,000 for Kiyosaki's "$190,000" face-value notes. If the notes are interest-only with a balloon of $190,000 at the end of the 30 years, they would sell for even less. Trading $190,000 worth of real estate for paper that is only worth $90,000 to $120,000 does not get you a financial genius secret decoder ring. Kiyosaki says "much of [the $19,000 a year interest income is] sheltered through our private corporation." In fact, corporations do not shelter income. The corporation' income is taxed when received at corporate tax rates. When that income is subsequently distributed to Kiyosaki, it will be taxed again at individual rates. Real estate investors generally do not incorporate. Accountant Bob Baldassari of McLean, VA says he and his colleagues almost never advise a small real-estate investor to incorporate because the disadvantages far outweigh the advantages. Smart note investors generally buy notes through their pension fund, which is not a corporation. Apparently Kiyosaki is not a smart note investor. He says he hopes they never pay off the $190,000 because he would have to pay taxes on the principal and because $19,000 paid over 30 years is $500,000. In fact, the taxes must be paid whenever any principal or interest payment is made, partial or complete payoff. There is no way to avoid paying the taxes. And the only way to defer paying the taxes is to defer receiving the income, which is cutting off your income to spite the IRS. If he did these deals, which involve buying and selling six houses, in a short enough period of time, he would likely be considered a dealer for tax purposes. Dealers are not allowed to use installment-sale treatment. That means he has to pay all the tax on the gain with the next quarterly income tax return after the closing, even though he has not received a penny of principal from the deal. If the borrowers literally never paid the $190,000 off, Kiyosaki would be out $190,000. Wanting to lose $190,000 is insane. Measuring your return on a 30-year note by multiplying the annual interest by the term of the loan is extremely misleading. The only way to measure payments received over a period of years is in terms of interest rate or present value. Bragging about cumulative interest paid on a 30-year note indicates that either Kiyosaki does not understand the first thing about finance, or he thinks you don't. A reader and I got into a dialogue about these notes and I came to the conclusion that the typical Kiyosaki follower literally does not know the first thing about finance. The people that guys like Kiyosaki and Sheets target are sort of the Thomson' gazelles of real estate"”people who are the weakest and most vulnerable because of their ignorance of real-estate-investment principles. Click here for a quick overview of some basic principles. On page 108, Kiyosaki brags that "$190,000 was created in the asset column and no taxes were paid." Not paying taxes in this case is hardly an accomplishment. The reason he has not yet paid any taxes is he has not received any money. He will start paying taxes the moment he receives any interest or principal payments on the $190,000. On page 24, Kiyosaki speaks of "building a track [sic] of houses." This does not demonstrate the command of real-estate terminology one would expect of a real-estate expert. (He means "tract.") Kiyosaki recommends various financial books, but only two real estate books: Donald Trump' Art of the Deal and Robert Allen' Creating Wealth. I think it' safe to say that no other experienced real-estate investor in history ever gave a list of recommended books that included only those two. Trump is a publicity-hungry, New York City high-rise developer whose book is only somewhat useful to the typical real-estate investor. It would rank very low on most lists aimed at individual investors. For a discussion of Allen, see the guru rating page of my Web site. There is a lot of incorrect conventional wisdom in this book. Kiyosaki book The whole truth about the subject in question The rich get richer. Sometimes, they get poorer. It' not how much money you make, it' how much money you keep. The more you make, the more you keep. By working harder, you simply increase the amount of taxes taken by the government. Working harder increases both your before-tax income and your after-tax income, as well your tax liability. What Kiyosaki says would only be true if the tax rate were 100%, which it never is. An intelligent person hires people who are more intelligent than they are. As a general rule, people who are smarter than you will not apply to work for you until you have reached a rather high level of success. On 8/21/00, the comic strip "Dilbert" made fun of this old platitude by having it uttered by the pointy-haired boss. His subordinates then gleefully pointed out that each boss in the company must therefore be dumber than his subordinates and that the CEO must be the dumbest person in the corporation. Most people work all their lives paying for a home they will never own. With each payment, their equity increases. Many people pay off their mortgage in full before they die. Almost all thoroughly enjoy their home both during and after the mortgage. Most people, working for a paycheck, are making the owner, or the shareholders richer. Irrelevant. You should choose what you do only according to how it relates to your goals. You should not resent others benefiting from your efforts. Indeed, you will prosper most when you help others achieve their goals. You work for the bank. After taxes your next largest expense is usually your mortgage and credit-card debt. Irrelevant. You should use mortgage and credit card financing whenever they will help you achieve your goals. Resenting bank profits is childish. The rich do not play by the same set of rules. Yes, they do. This is sour grapes less successful people use to rationalize their inability to succeed. They lack the character to simply admit that they got beat fair and square in the economic aspects of the game of life. It is the knowledge of the power of the legal structure of the corporation that really gives the rich a vast advantage over the poor and middle class. None of my rich friends make any use of corporations. I became a millionaire in 1983 and never used a corporation. Corporations have both advantages and disadvantages. Most real estate investors do not use corporations. Note investors use IRAs and such. Kiyosaki claims to be mainly a real-estate investor. See my discussion below on corporation advantages and disadvantages. The reason I minimize my income is because I don"t want to pay it to the government. Minimizing one' income is idiotic. You are always better off with more income. This would only make sense if the tax rate were 100%. You should have a corporation and a board of directors. One of my graduate-business-school professors called this "Managing the company from the fiftieth floor when you only have a one-story building." Having an outside board of directors when you are an individual real-estate investor, with or without a corporation, is a silly affectation. Corporations are costly, time-consuming, and complicated and have many disadvantages like preventing you from employing your minor children and deducting the wages without having to pay social security, withholding and so forth. Corporations cannot escape those taxes or paperwork on minor employees. In some states, the owner of an incorporated company cannot represent himself in small claims court and must hire an attorney for every little legal matter. I love it when my real estate broker or stockbroker makes a lot of money. Because it usually means I made a lot of money. It means no such thing. Brokers profit strictly from transactions, regardless of whether they are also ultimately profitable for the clients. I only play with money I can afford to lose. A loss is a loss. All losses make you worse off. There is no line which separates losses that matter from those that do not. You should not invest in something unless you have a reasonable degree of confidence that you will not lose. There are several books, like Innumeracy and Why Smart People Make Big Money Mistakes, that condemn this kind of thinking. Action always beats inaction. Sometimes inaction is the best course, like when you are thinking about selling real estate or a stock that subsequently goes up.