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Robert Kiyosaki Why the Rich Get Richer

Robert Kiyosaki, Why the Rich Get Richer

Adventures in the Investing Food Chain

by Robert Kiyosaki

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Posted on Monday, June 11, 2007, 12:00AM

One of my more popular recent Yahoo! Finance columns, "Playing the Mutual Fund Lottery," wasn't written entirely by me -- my friend, CPA, and trusted tax advisor, Tom Wheelwright, was the primary author.

While the piece was written in jest, Tom made valid points about why retirement plans filled with mutual funds are risky. As expected, the reader response was both positive and negative. Some people just didn't get the joke, or couldn't learn from its absurd extremism.

Unfunny Lessons

Obviously, the lottery is for losers, casinos are for gamblers -- and mutual funds are for dreamers. While there are some good funds, for the most part the only people getting rich from them are a few key employees of the mutual fund companies.

As you've no doubt read, Wall Street is paying out record bonuses to employees even though most funds perform marginally. In March of this year, the Wall Street Journal reported that Congress finally opened an investigation into the 401(k) and mutual fund industry. It's about time.

In my lottery column, Tom pointed out that tax laws are horrible for mutual fund investors. These people are being taken to the cleaners not only by the fund companies but also by the federal government. So to all of you who love mutual funds and hated the column, you may want to read it again to glean some of its not-so-humorous financial lessons.

The Investing Food Chain Explained

While I'm not a CPA, I am an investor. As such, there are a number of reasons why I don't care for mutual funds. One comes from a lesson my rich dad taught me. He said, "Humans are at the top of the food chain, and capitalists are at the top of the investing food chain."

To illustrate, he created the following diagram:

In the investing food chain, capitalists are at the top and workers are at the bottom. You'll notice that mutual fund investors are just above the bottom.

Professional investors often ask, "What position are you in?" That's another way of asking, "Where are you in the investing food chain?" Bankers, as a general rule, want to be in first position. If anything goes wrong with an asset, they want to get paid first. That's what being in the first position means -- you get paid first. So one of the reasons I don't care for mutual funds is simply because mutual fund investors are close to the last to get paid.

During the Enron debacle, it was workers who took the pounding, not bankers. Not only did Enron employees lose their jobs, many lost their retirement savings. That's because they were at the bottom of the investing food chain.

Still not convinced? Try asking your banker if he or she will lend you millions of dollars to invest in mutual funds or stocks to fund your retirement. I suspect the answer will be a polite, "No, thank you." Bankers want to be in the first position, not the last.

More Food Chain Lessons

There are other lessons to be learned from the investing food chain. One is the power of debt in contrast to equity. Debt holds a higher position than equity, and bankers and bondholders are in debt positions. Preferred stocks, stocks, and mutual funds are in equity positions.

The takeaway here is that most amateur investors try to get out of debt positions and into equity positions, where they invest with their own money or assets. Professional investors would rather be in a debt position -- investing with a banker's money, for instance -- simply because debt is less risky than equity.

Another term professional investors use is "subordinated debt." This is simply debt in a lower position on the chain than that of another claim on the asset. Many homeowners have it in the form of a second mortgage. If they fail to pay this subordinate debt, the banker in second place gets what's left after the banker holding the first mortgage gets paid.

Most homeowners have debt that's known as recourse financing, or full-recourse loans. As a professional real estate investor, I ask for non-recourse financing.

What's the difference? If a homeowner has recourse financing, that means the banker can go after the homeowner's other assets if the mortgage isn't paid. If the bank forecloses on the home and there's not enough money from the sale to cover the loan, the banker can sue for the homeowner's other assets, such as cars, stocks, bonds, and so on.

With a non-recourse loan, the banker can only get the property the loan was made against. The borrower's other assets are off-limits, although most bankers will try to get those as well.

Subprime Debt Feeds Off Workers

The subprime mess is another example of big fish eating little fish in the investing food chain. When interest rates dropped, mortgage brokers began calling people who had no business borrowing money and offering them loans they could never hope to repay. With low interest rates and consumer demand, the price of homes went up and caused a real estate bubble.

Now that the bubble has burst and home values are dropping, many little fish owe more on their homes than the home is worth. I suspect the real estate bubble will continue to deflate as more and more people are forced into foreclosure. People will lose everything because they can't pay their full-recourse loans. Not only will they lose their homes, but many will be forced to liquidate their other assets.

Here's the worst part: Much of the money for subprime mortgages came from the bottom of the food chain. Billions of dollars for these loans were drawn from workers' pension funds, where they were touted as "collateralized debt obligations," or CDOs (a few years ago they were called junk bonds).

Consequently, it's estimated that employee pensions could lose $75 billion dollars on bonds backed by subprime debt. Not only are workers losing on the value of their homes, their retirement plans have been poisoned, too.

Compare and Contrast

So what can you take away from such investing food chain behavior? This contrast might be useful:

My rich dad trained his son and me to be capitalists, and we become entrepreneurs and real estate investors. Instead of working at jobs and investing with equity, we create jobs and invest with debt with our bankers' money. My poor dad encouraged me to be an employee and trust my money to a pension plan.

Simply put, one dad pointed to the top of the investing food chain, the other to the bottom. My question to you, then, is, "Where are you on the food chain?"

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549 Comments

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  • Yahoo! Finance User - Saturday, July 28, 2007, 4:36PM ET  Report Abuse

    • Overall: 1/5

    The first position for a debt holder vs an equity holder seems only relevant when a company is liquadated. Plus, as a capitalist, one is also investing a greater portion of his wealth into his business in the form of debt/equity and hence taking a much bigger risk vs someone who invests in mutual fund which is much more diversified.

  • wickedmourner - Thursday, July 19, 2007, 1:53PM ET  Report Abuse

    • Overall: 1/5

    Kiyosaki: You, sir, are a jerk. And incorrect. Investing in indexed mutual funds is the *only* guaranteed way to get "rich". You don't need to have any sort of entrepreneurial drive, and you don't have to be a banker (what he hell IS a baker these dyas, anyway?). Investing in no-load indexed mutual funds is basically investing in the American Economy. Just put your money in, Dollar Cost Averaged. Anyone can get rich with enough time. And just what the hell kinds of stocks would people buy, anyway? Are you advocating that people should try to be market-timers? That doesn't work for 99% of professionals (they fail to beat the indices over 10 years). You somehow think that the only way to wealth is through entrepreneurship ... but the only kind of entrepreneurship I see from you is "real estate", which frankly anyone with enough seed money can make a profit from. Furthermore, only commercial real estate should be seen as an "investment" -- investing in homes directly hurts families by driving up the prices, due to the fact that everyone wants to 'flip' one. It is the culture purveyed by people like you that is the cause of all these foreclosures ... people trying to 'get rich quick' off their real estate, incurring too much debt, and harming their families, as well as the social fabric of our country. Have you no shame?

  • Yahoo! Finance User - Monday, July 16, 2007, 7:58PM ET  Report Abuse

    • Overall: 1/5

    Why is Yahoo paying this idiot to give advice?

  • Yahoo! Finance User - Sunday, July 15, 2007, 12:45AM ET  Report Abuse

    • Overall: 4/5

    This article seems pretty logical to me. Negative comments are fine.. Just back them up with actual facts or you're just as bad as what you claim RK to be...

  • Catherine - Thursday, July 12, 2007, 4:08PM ET  Report Abuse

    • Overall: 4/5

    To a beginner or a worker, the jargon can get confusing. I guess that must means that I have more research to do.

  • fred j - Monday, July 9, 2007, 2:58PM ET  Report Abuse

    • Overall: 1/5

    As pointed out by many other people, this "investing food chain" analogy is nonsense.

  • Yahoo! Finance User - Thursday, July 5, 2007, 10:13AM ET  Report Abuse

    • Overall: 5/5

    The people reading RK's column have a hunger for financial knowledge, yet some people apparently do not get it judging from some of the comments. These people are obviously small-minded wanna-be non-investors who think they know it all and are on the path to financial self-destruction. Listen and learn or crash and burn folks. Thanks.

  • RICHARD F - Friday, June 29, 2007, 1:17PM ET  Report Abuse

    • Overall: 1/5

    This guy is a charlatan magic beans salesman. No successful real estate transactions to his name and his views are based on 20/20 hindsight. Wealth can come from a variety of things and yours has come on selling books filled with false hope and lies. Those who buy into your system are those who think the late night real estate and gold informercials are the way to go.

  • Yahoo! Finance User - Friday, June 29, 2007, 3:12AM ET  Report Abuse

    • Overall: 1/5

    I have constructed a "Journalist Food Chain" and I'm sorry to report that your self-referential nonsense has landed you at the very bottom of it.

  • Yahoo! Finance User - Wednesday, June 27, 2007, 4:25PM ET  Report Abuse

    • Overall: 4/5

    This guy Rocks! CDO's are todays Junk bonds! I love it. Clear and concise - if you don't understand the food chain, you better run for cover because you're the next meal.

  • Yahoo! Finance User - Wednesday, June 27, 2007, 10:51AM ET  Report Abuse

    • Overall: 1/5

    what a total moron. does rk really understand anything? why does yahoo even bother to post his waste pile

  • Tim - Wednesday, June 27, 2007, 3:32AM ET  Report Abuse

    • Overall: 1/5

    I dont know what the point of this article was, maybe just to write something and say you did.

  • Yahoo! Finance User - Tuesday, June 26, 2007, 8:59PM ET  Report Abuse

    • Overall: 1/5

    As usual, this guy just fill his article with nonsense examples and bad ideas.

  • Emma - Tuesday, June 26, 2007, 6:21PM ET  Report Abuse

    • Overall: 1/5

    Get a new CPA, yours is an idiot!

  • John - Tuesday, June 26, 2007, 1:44PM ET  Report Abuse

    • Overall: 5/5

    J. Willard Marroitt said when he first came to Washington (his hot dog stand was on K street) he owed 5000 dollars and now he owes 50 million (this was a while ago) - and he hated debt! Doing smart things with other peoples money... da.

  • John - Sunday, June 24, 2007, 7:27PM ET  Report Abuse

    • Overall: 1/5

    I've got to say I like reading the comments to this guy's articles. In this one, he admits to plagarism - thanks to those who pointed that out in his last column. I don't care one way or another for this guy, but his articles make very little sense and often (I have to believe intentionally) confuse legal and financial terms. This is more of the same. His articles are to be read with a healthy dose of skepticism.

  • Yahoo! Finance User - Saturday, June 23, 2007, 11:00PM ET  Report Abuse

    • Overall: 5/5

    insightful as usual. simple 'food-chain' diagram very helpful.

  • Yahoo! Finance User - Saturday, June 23, 2007, 2:22PM ET  Report Abuse

    • Overall: 5/5

    Robert is a straight shooter. If you actually take the time to understand what he is teaching - you would be better educated. I am thankful that Robert had two Dads’ - One that taught him how to think about money, and the one that we all now benefit from - the teacher.

  • William - Saturday, June 23, 2007, 12:22PM ET  Report Abuse

    • Overall: 1/5

    Capitalists? What the heck are you talking about Bobby K?

  • Yahoo! Finance User - Friday, June 22, 2007, 11:40PM ET  Report Abuse

    • Overall: 5/5

    This guy is right on track. The only folks not liking him are the ones dealing in junk.

  • Yahoo! Finance User - Friday, June 22, 2007, 8:01PM ET  Report Abuse

    • Overall: 1/5

    This is an exceptionally poor article, even by the low standards Kiyosaki has set for himself. Kiyosaki seems to be so proud about using non-recourse financing that he puts himself at the top of the investing food chain. But non-recourse financing simply means that a borrower can't lose more than 100% of his investment. That's a characteristic shared by practically every investment under the sun, including the mutual funds which Kiyosaki puts at the bottom of the food chain. So which is it Robert? You can either move yourself to the bottom, or put mutual funds at the top - both get paid last.

  • Yahoo! Finance User - Friday, June 22, 2007, 1:31PM ET  Report Abuse

    • Overall: 4/5

    Seems to me a straightforward sort of thing really. If you want to learn about having a good relationship ask someone who has one...similarly if you want more money in your pocket then talk to someone who has more than you do...doh! And let's face it, Robert probably has more than most. I've been reading RDPD2 this week and Robert makes the comment that cynics are as dangerous as con-men when it comes to money. I agree. My advice as an accountant is listen with respect to a man who really knows about making money - RTK.

  • Yahoo! Finance User - Friday, June 22, 2007, 2:21AM ET  Report Abuse

    • Overall: 5/5

    The comments after each one of Kiyosaki's articles are entertaining. What's that old saying about leading a horse to water...? Two major rules of trying to teach others about anything, especially financial subjects: you can't teach desire; and you can't help those who don't want to be helped. Critics here come from middle class values. They were taught these values by their family, friends, neighbors, etc and cling to them for life. They diversify their portfolios, pinch pennies and worry about social security. They don't realize that the harder they go for financial 'security,' the less they actually have. They go to the 9 - 5 jobs that grind them down every day, max out their 401k's and figure they're OK because heck, that last real estate boom really made their house worth a lot! That home equity loan will buy an awesome big SUV! Financial education and true investing is another world to them - one that few of them will ever see. Not because they can't but because they won't. That's OK. Fear and laziness are the two biggest enemies to expanding one's context. These things are just too strong in some people to see the real world of financial opportunities all around them. Those here (you are obvious by your posts) who have overcome the fears and laziness and who have experienced success in the world of true investing owe it to themselves not to become frustrated with the critics here. Learn from them: see how those middle class values come through and remind yourself how you can sidestep those wealth-killing beliefs in your own life. Learn by example: the example of how NOT to think. Remember, at some point, you probably thought a well-diversified equity portfolio and a secure corporate job was going to make you rich, too! Kiyosaki is not a god. He has his great points and some questionable ones. However, all of his material is valuable in that it makes you THINK if you let it. Or you can just blankly claim that it is all junk like the middle-classers. Of course, how many of them co-authored a book with Trump and are head of their own multi-million dollar marketing company? (Surprise, ratracers: that is what richdad co. really is). True investors: you'll see the usual rants here about John T. Reed this (how old is that debate now? Reed is STILL pissed about losing market share) and Kiyosaki didn't really do any REI deals that (one idiot actually based the extent of Kiyosaki's RE holdings on how many times county records showed his name, assuming anyone would be dumb enough to hold all of their RE in their own name). But these people keep coming back week after week to read the articles, huh? Hmmm... I'm thankful they do. I love the critics' posts - they are lessons on how NOT to think and the values to NOT hold onto. Very valuable stuff. So thank the critics, true investors. You learn success from some people by imitating some of their traits; you learn success from other people by AVOIDING some of their traits. Like Kiyosaki says so well: mind your own business and 'BE the bank'!

  • Yahoo! Finance User - Friday, June 22, 2007, 12:28AM ET  Report Abuse

    • Overall: 4/5

    As with most of RK's other articles, the average amateur investor (worker) will read and reject. That's because they are worker mentally, and will be a worker the rest of their lives. Too bad. Many just didn't learn anything at all from Enron. I read Rk's book, "Rich Dad, Poor Dad" with my wife, years ago, and it changed my life. My parents still advise me on the age ole bad advice of being an employee and getting laid off every 5 years; while the CEO cashes in his stock. RK presents another option. Be a capitalist. Migrate to the top of the money chain. And it makes sense that bankers are at the top. They write and own the rules of money access. If you don't like RK, stop reading his advice and give your money to the same mutual fund idiots that lost 75% of your portfolios while you payed them to manage it, from 2000 to 2003.

  • familyman05 - Thursday, June 21, 2007, 6:27PM ET  Report Abuse

    • Overall: 1/5

    I'm not sure if it's his ideas or his writing, but this column doesn't seem consistent with his thoughts in other columns. After all, he has made his money through equity investments in real estate and in this column he is saying that debt is the way to go. So which one is it Robert? He isn't even consistent within the article. He says debt is the way to go, but then says worker pensions that invest in debt (collateralized debt obligations) are poisoned by the debt. The real answer is that the best solution depends on your situation. Availability of capital, time horizon, risk aversion etc. ...but you have to know how financial systems work. That is the unmentioned point that is clearly borne out in his column. Those that learn about finances will make money those that choose to remain ignorant will continue to be taken advantage of. The bankers selling the collaterized debt obligations aren't in equity or debt positions, they are just packaging one group of financial instruments into others and getting rich off of the transaction fees. Hmmm, no debt or equity, I guess that qualifies them as workers ... so why are they getting rich? ...because they understand finances. Robert writes these columns that make me wonder what color the sky is in his world. His thoughts are all over the board and I'm not even sure what his point is? Maybe his purpose to be so disjointed as to cause everyone else to think a little bit more about their finances.

  • Yahoo! Finance User - Thursday, June 21, 2007, 4:45PM ET  Report Abuse

    • Overall: 1/5

    Usual rubbish advice. The best way to achieve financial safety is by holding a diversified equity portfolio for a long time. Mutual fund companies are general okay-not-great but newer products like ETFs are a positive step forward because you get the maximum benefit for the least amount of money. Kiyosaki should be axed in favor of John T Reed. If you haven't read what Reed wrote about Kiyosaki, go to Reed's website and do so. Reed is proper real estate investor not a phoney like Dumb Dad, Broke Dad.

  • Yahoo! Finance User - Thursday, June 21, 2007, 2:02PM ET  Report Abuse

    • Overall: 5/5

    Most of you people are bumbling fools! Thanks again for another great article Robert. You've cleared up a few terms I was struggling to understand in this piece.

  • viviana - Thursday, June 21, 2007, 2:27AM ET  Report Abuse

    • Overall: 5/5

    Hello. Wow it is good news for over people who like to have money so much. Because the poor does not work hard too but I think that it is not much to work that money pays. Love when advice is to give to poor but wanting rich leaders.

  • LanceM - Wednesday, June 20, 2007, 4:05PM ET  Report Abuse

    • Overall: 1/5

    RK, You have inspired me! If a dope like you can get rich spouting this tripe, imagine what an intelligent person is capable of!!

  • Yahoo! Finance User - Wednesday, June 20, 2007, 2:34PM ET  Report Abuse

    • Overall: 1/5

    Garbage...

Showing comments 6-35 of 549<< PreviousNext >>
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