Big Wave Financial Surfing
Rich dad. “No one has a crystal ball with 20/20 vision. But between now and the biggest crash of all, I predict there will be smaller, but growing booms and busts in the stock market. These smaller booms and busts will come before the biggest of all booms and biggest of all busts.”
“So there will be warning signs?” Mike asked.
“Oh yes,” smiled rich dad. “There will be plenty of them. The good news is that you boys will have plenty of time to practice gaining experience and skill through these smaller booms and busts. Just as you two practice surfing on the smaller waves of summer in preparation for the larger waves of winter, I would recommend you do the same with your investing skills. As the booms and busts get bigger and bigger, you’ll find it easier to become richer and richer.”
“But others will become poorer and poorer,” I said quietly.
“It will be survival of the financially fittest and the financially smartest,” said rich dad. “It will be survival for those who are prepared, just as Noah prepared for the future by building an ark. I have been training you boys to build an ark also.”
When I was a kid, my rich dad rarely talked about gold, except to say that it backed our money. What that meant, and its significance went over my young head.
Later, when I received his letter while I was in Vietnam, I knew he was excited about the change Nixon made when he took the dollar off the gold standard. His message was simply this: With our dollar separated from gold, the rich were about to play games with money as the world had never seen before. He explained, “As the price of gold goes up and down relative to the dollar, there will be the biggest booms and busts the world has ever seen. With gold separated from the dollar, we are entering a period of extreme financial instability. Inflation will go through the roof. The rich will get very rich and others will be wiped out.”
I did not fully understand his message at the time. But now that I’m older and wiser, I believe he was saying that this was his time to become very rich. This was the opportunity of his lifetime—and he was right. My rich dad became very rich while the economy boomed. My poor dad clung to job security and missed the biggest boom in history.
If you remember, between 1990 and the year 2000, the stock market boomed because there were so many 30 to 50-year-old baby boomers entering the stock market, saving for their retirement in their DC pension plans, so there was a stock-market boom. There was a similar boom in the 1970s when baby boomers left home, left college, and began buying their first home. If you are old enough to remember those years, you may remember the mania over real estate—a mania that was also followed by panic and a bust when interest rates went over 20 percent. Interest rates were raised in order to slow down inflation, which was caused partially because 75 million baby boomers had entered the job market and now had money to burn. In other words, 75 million people buying anything will cause a boom. The reverse is also true—75 million people selling anything will cause a bust. It is the basic law of economics, the law of supply and demand.
Why Do Booms and Busts Happen?
Sir Isaac Newton, who lost most of his fortune in the South Sea bubble, is quoted as saying, “I can calculate the motions of heavenly bodies, but not the madness of people.” When there is madness and everyone is thinking about getting rich quick in the market, it’s usually just a matter of time before many people lose everything because they invested in the market with borrowed money, instead of first investing in their education and experience. When that happens, many people sell in a panic. That is when the qualified investor really becomes wealthy.
It is not the crash that is so bad, but the emotional panic that occurs at the times of such financial downturns. The problem with most new investors is that they have not yet been through a real bear market, so how would they know what a market crash and bear market feels like, especially if it goes on for years?
Rich dad said, “There may or may not be this giant stock-market crash, but I can assure you that there will be booms and busts. There always have been booms and busts in the past, and there will always be booms and busts in the future. Predicting that booms and busts are coming is not much of a prediction.”
The ﬁnancial booms and busts the world has been experiencing have been caused by trillions of dollars in fake money being pumped into the system. Inflation occurs when there is too much money in the system.
On the flip side, deflation occurs when there are too few dollars in circulation. When that happens, prices start to fall. For example, in inflationary times, the prices of houses go up. In deflationary times, prices of houses come down. If the prices of houses begin to drop too fast right now, it could be 1986 all over again.
The strong economy we’ve been experiencing for years has thus been built on dumb money—in addition to smart money—borrowing more and more.
Booms: The Perfect Time to Learn
Rich dad said, “Invest for cash flow, and you’ll never worry about money. Invest for cash flow, and you will not be wiped out in boom and bust markets. Invest for cash flow, and you’ll be a rich man.”
From my perspective, the largest risk you face is not taking steps to actively improve your financial intelligence—and thereby not building your foundation or following the fundamentals. In our fast-moving society, you must educate yourself and continue learning every day. And I don’t mean by heading back to school for an advanced degree if that’s not something that interests you. After all, Mark Twain once said, “Never let formal education get in the way of your learning.”
Rich dad taught me that just as I had practiced surfing nearly every day, riding the ups and downs of the waves, if I practiced riding the ups and downs of financial markets and financial cycles that my skills would improve.
Being proactive, educated, and prepared is much better than the financial strategy most people have when it comes to their investments—the passive strategy of “buy, hold, and pray” that the stock market will always boom and never bust. Of course, people who believe that the stock market only goes up and never comes down probably also believe in the Easter Bunny.
Editor, Rich Dad Poor Dad Daily