The Fundamentals Of Successful Investing
Being in the financial education atmosphere for decades, I often get asked, “Robert, how do I get started with investing?”
Before you even begin looking for investing advice, you have to know what information you’re looking for. This depends on the dream and goal you have.
Doing what successful people do is easy. One of the reasons there are wealthy people who didn’t do well in school is because the “do” part of becoming wealthy is simple. You don’t have to go to school to become rich. The “do” part of becoming rich is not rocket science.
Think and Grow Rich by Napoleon Hill is a classic book I read when I was younger. I recommend that you read it as well. There’s a reason why the book starts with “think” in the title instead of “work hard” or “get a job.” The fact is that the people who simply work the hardest are not the ones who become financially free. Instead, you must learn to think differently than others, to not go along with the crowd.
In my opinion, one of the greatest assets that successful people have is that they think differently than everyone else. This is because if you think as everyone else does, then you’ll have what everyone else has. And for most people, what they have is years of hard work, unfair taxes, and a lifetime of debt.
It’s Not What You Do That Matters
When someone asks me, “What do I have to do to move from the left side of the CASHFLOW Quadrant [the employee and self-employed side] to the right side [the business owner and investor side]?” my response is, “It’s not what you do that has to change. It’s how you think that needs to change.” In other words, the key lies in who you are to do what needs to be done.
For instance, when I was young, I learned about money and wealth by playing Monopoly with my rich dad. He taught me that the key to winning in the game was to buy four green houses and trade them up for a red hotel. That is also the formula for wealth in real life, and Kim and I have used it to grow our wealth.
When I tell people that, they smirk. Surely it can’t be that easy, right? It all depends on you. Do you want to be the kind of person who thinks buying four green houses and turning them in for one red hotel is easy? Or do you want to be the kind of person who thinks it’s hard?
Be, Then Do
In the 1970s, I took a goal-setting class. It cost me $150 and my weekend. Many times I almost backed out to go surfing instead, but thankfully I didn’t. What I learned from that goal-setting class has helped me achieve what I wanted in life.
At the beginning of class, the instructor put these words on the board:
She explained, “Goals are the ‘have’ part of these three words: goals such as have a nice body, be in a perfect relationship, or have millions of dollars. Once people figure out their goals, what they want to have, they begin listing what they have to do to achieve the goal. That’s why most people have to-do lists. They set their goal and then begin doing—that’s also when they begin failing.”
Using the goal of the perfect body, the instructor talked about the approach most people take: to go on a diet and hit the gym. “This lasts for a few weeks,” the instructor said, “and then most are back to their old habits. That is an example of doing instead of being.”
She finished with a powerful line, “It’s not the diet that counts. It’s who you have to be to follow the diet that counts.”
A New Way Of Being
Moving from the left side of the CASHFLOW Quadrant to the right side is not so much about doing but about being. It’s not what those who own businesses or invest successfully do that make the difference; it’s how they think and who they are at the core of their being.
The good news is that it doesn’t take much money to change your thinking. It can be done for free. The bad news is that sometimes it’s hard to change your core beliefs about money that are handed down from generation to generation, or learned from friends, work, and school. But it can be done.
Rich Dad is not about giving you a how-to list. It’s never been about which stocks to buy or which mutual fund is the safest. For us, successful financial education teaches us not what to do, but instead how to be.
Since our start, we’ve always been about your thoughts (being) so that you can take action (doing) that will enable you to become financially free (having).
Once you’ve decided who you want to be, you have to get educated. It’s easy to have someone tell you what to do, but that’s the riskiest gamble you could ever take.
Rich dad was adamant that to be successful in investing, you need financial intelligence. His definition of financial intelligence was as follows: It’s not how much money you make, but instead how much money you keep, how hard it works for you, and how many generations you keep it for.
For those looking in from the outside, a person with financial intelligence seems almost like a wizard with money. They seem to make it out of thin air, and often it seems like this is done almost without any effort. And they seem to always be getting richer. It can be mystifying and maddening for those with low financial intelligence.
The reality is that if you have high financial intelligence, you can see where the money is flowing, be there before others are, reap the benefits of that money by acquiring assets that grow in value and provide cash flow, and then use that money to then go acquire more assets where more money is flowing. The work is in seeing, then money works for you. It isn’t a magic trick, but you have to study like a magician to be good. It takes dedication for years, but it’s the best thing you could spend your time getting good at.
For rich dad, financial intelligence started with simple financial education and grew from there. He felt that education was important because you needed to train your brain to see money; it doesn’t come naturally.
Understand The Financial Statement
The reality is that money doesn’t make you rich. What does make you rich is your financial IQ. Give the same $100,000 to a person with a low financial IQ and a person with a high financial IQ and I guarantee you’ll see a vast difference in how that money is spent and grown.
Central to the difference between those with low and high financial IQs is a simple but profound literacy: the ability to understand a financial statement. One of the most important things you need to know to be financially successful is to know how to read an income statement and balance sheet.
But even more important is understanding the relationship between them.
Many people who take accounting classes learn how to read an income statement and balance sheet separately. I’ve always found it fascinating, however, that these classes don’t teach why one document is important to the other or how one affects the other.
My rich dad felt that the relationship between the two was everything. “How can you understand one without the other? How can you tell what an asset or liability is without the income column or the expense column?” he asked.
For rich dad, understanding the relationship between the two allowed you to easily see the direction of your cash flow to easily determine if something was making you money or not.
If something was making money, it was an asset. If not, it was a liability. “Just because something is listed under the asset column does not make it an asset,” said rich dad. “The reason people suffer financially is that they purchase liabilities and list them under the asset column.”
Understanding the relationship between the income statement and the balance sheet allows you to quickly understand if an investment is an asset or a liability—and this understanding will allow you to make the right investment every time.
Stick With The Fundamentals
Most people think of investing as any situation where you put down money with the expectation of getting a return on your money. Unfortunately, what many people think of as investing is gambling.
This mentality is why so-called “investors” bought into the real estate market when it was hot, prices were soaring, and they invested in the hope that home values would keep going up and up, even taking on properties that cost more to buy and maintain than they could be rented for, only to get caught in the real estate bubble when it crashed. On the other hand, investors who understand the fundamentals of real estate investing refused to buy houses that couldn’t cash flow, and sold properties they’d acquired before the boom for a nice profit.
In any kind of investing, what sets the gamblers apart from the true investors is understanding the fundamentals. Knowing and following the fundamentals takes much of the risk out of investing. There’s always some risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.
So learn the fundamentals, start small, gain experience, and you too can become a savvy investor.
Editor, Rich Dad Poor Dad Daily