Educate Yourself into Riches

Many of Wall Street's elite firms were being required to pay tens of millions of dollars in fines to investors, according to media reports. The penalties are for alleged bad investment advice, courtesy of New York State Attorney General Eliot Spitzer.

This brings me to one of my favorite quotes from famed investor Warren Buffett goes: "Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway."

I have been highly critical of the standard financial planning advice -- "work hard, save money, get out of debt, invest for the long term, and diversify" -- for a long time. Such guidance is often more a financial advisor's (subway rider's) sales pitch than a solid investment guide.

But while I think it's courageous that Spitzer slaps millions in fines on a few Wall Street firms for their bad investment guidance, I believe the investors who accepted that unsound advice have some responsibility, too. Isn't knowing the difference between good and bad advice part of knowing what you're doing?

The Difference Between Investing and Shopping

The problem is, most investors don't know how bad the standard investment advice is. This mantra of "work hard, save money, get out of debt, invest for the long term, and diversify" is followed by millions of investors -- who lost $7 trillion to $9 trillion between 2000 and 2004. Many are still following this bad advice today.

Not only did millions of investors lose trillions of dollars, many also missed the boom in real estate, oil, gas, and previous metals. Furthermore, despite investors' huge losses, Wall Street paid out some of its biggest bonuses in history.

However, investors should realize it's "buyer beware." Investing is different from shopping. If I go to Sears and don't like the tool or shirt I purchased, I can generally get my money back. When we go shopping, we expect value for our money. But when we invest, we do so in the hopes of making more money -- and knowing that we risk making losses. What would happen to the financial industry if brokers were sued every time a client lost money? The wheels of world commerce would grind to a halt.

My point is: The world is filled with honest people handing out bad advice. An example of honest bad investment advice is the standard one of "work hard, save money, get out of debt, invest for the long term, and diversify".

The world is also filled with biased advice, which is why people say, "Never ask an insurance broker if you need insurance, or a mutual-fund sales person if they recommend mutual funds." Furthermore, there are many crooks and con artists as well, who intentionally promote dishonest ventures.

Spotting the Difference

So while it's imperative that we have the Securities and Exchange Commission and a brave Attorney General such as Spitzer to enforce the rules, we, as individual investors, still need to be vigilant and personally responsible for the advice we receive and what we do with our money.

In my opinion, that means each of us needs to be responsible for our own financial education so we can tell the difference between good advice, biased advice, and crooked advice. If you can educate yourself to know the differences between those three types of advice, getting rich is easy.

Or, if you take investing advice from a subway rider, don't be surprised if you wind up on the subway.

When Good Advice Isn't

In January 1998, I was watching a very popular morning television show. The two very attractive hosts, one male and one female, smiled toothy grins and said, "This morning we have our network's investment expert in the studio to give us her financial advice for the start of the year."

The camera cuts away to an extremely attractive young woman who smiles into the camera and says, "For 1998 my advice is to work hard, save money, get out of debt, invest for the long term, and diversify."

The female host smiles and says, "That is such good advice. I hope everyone follows it."

The male host, frowning a little in an attempt to appear more thoughtful and intelligent, asks, "What do you recommend they invest in?"

The attractive young woman smiles her perfect smile and says she recommends a well-diversified portfolio of mutual funds with an emphasis on the technology sector.

"Great advice," say the male and female hosts in unison. Once again, they smile to the camera and thank the financial expert for her advice and for appearing on the program. And they cut to a commercial. A commercial for a mutual fund company.

Over the next few years, all the way through 2005, this same TV program invited the same financial expert on the program and each time the advice was exactly the same: "Work hard, save money, get out of debt, invest for the long term, and diversify." The only thing that changed was the year and the clothes worn by the three people. If they had simply rerun the January 1998 show, the effect would have been largely the same -- same advice, same smiles ... but horrible results.

Between 1995 and 2005 the millions of people who followed that advice lost an estimated $7-9 trillion. And much worse than losing $7-9 trillion, the people who followed that advice missed out on what the Economist magazine called the biggest financial boom in history. So not only did those investors lose money from the 2000-2003 stock market crash, they failed to make a lot of money in the financial boom in real estate and commodities. That is the price of bad advice.

In upcoming columns, I'll explain in detail why the standard financial advice of "work hard, save money, get out of debt, invest for the long term, and diversify" is bad financial advice because it's obsolete. The world has changed. The advice hasn't.

Rich Dad's Advice

In 1997 my wife Kim, our partner Sharon Lechter, and I self-published a little book titled "Rich Dad Poor Dad." It is a true story of my two dads -- one a highly-educated teacher and the head of education for the State of Hawaii and the other a man who dropped out of school at the age of 13. The superintendent of education is my real dad, the man I call my poor dad. My rich dad is my best friend's father.

The reason the book was self-published was because the major publishing houses rejected it. No one thought it would sell. Today "Rich Dad Poor Dad" has been on The New York Times bestseller list almost five years, a feat accomplished by only three other books in the history of The New York Times. The book has been published in over 44 languages and has sold nearly 23 million copies.

One of the reasons for the book's popularity is because it explains why the rich are getting richer and why millions of others are following risky and obsolete financial advice -- advice such as save money, invest for the long term, and diversify. Another reason for the book's popularity is because many of those who followed my rich dad's advice became very rich during the same period of time when millions of people were losing trillions of dollars in the stock market.

So, I am honored to have been asked by Yahoo! Finance to write this column. For those of you who are familiar with my work, thank you and welcome. For those of you who are not, I think you'll find this column different, a divergence from the standard financial car wash.

If you're looking for new ideas about the world of money, business, and investing then I believe this column will provide it. The information may not be comforting or popular, but it will be factual and come from real life experience. Also, this column is not about advice. What I invest in, while not risky for me, may be too risky for most people. Also, I have no investments to sell you. Although I have founded gold, oil, silver, publishing, manufacturing, and real estate companies, I am not writing to sell you shares in any of them. If I have anything to sell, it would be financial education products -- products that are created to support your financial education.

The reason I write is to enlighten, to open eyes, to entertain, and, most importantly, to educate those who are looking for new ideas about money -- even if unpopular. There are more opportunities to become rich today than ever before, but you may not get rich if you follow the obsolete advice of "work hard, save money, get out of debt, invest for the long term, and diversify." In fact, following that advice may make you poorer.

Investments That Pay Today -- and Tomorrow

Words have the power to make you rich -- or keep you poor. For example, you have to know the difference between an "asset" and a "liability." An asset is something that puts money in your pocket, and a liability takes money from it.

Take your house, for example.

"Our house is an asset," my poor dad would say.

But, my rich dad saw things differently. "Your house is not an asset, but a liability," he said.

You see, even though my poor dad thought of his house as an asset, the fact is that every month it took money from his pocket via mortgage payments, utilities, and upkeep.

Now my rich dad owned several houses. But instead of depleting his wallet, those homes were rented out. They generated enough income to cover his expenses -- with money left over. That's a true asset.

Now or Later?

In addition to "asset" and "liability," there are two other very important concepts you need to understand: "Cash flow" and "capital gains."

One of the reasons I was able to retire at age 47, and my wife, Kim, at 37, was simply because we had enough cash flow coming in (primarily from our real estate investments). It wasn't much -- about $10,000 a month -- but we only had about $3,000 in monthly expenses. That left us with $7,000 a month to do with as we pleased.

On the other hand, capital gains are when you buy a stock for a dollar, and it goes up to $10 so you make $9 a share. Or, you buy a house for $100,000, and it appreciates to $150,000. You sell it and make $50,000.

One of the reasons people do not become financially free is because most of them are focusing on capital gains rather than cash flow. Chasing capital gains alone is gambling -- not investing. Want proof? You don't have to go back very far to find it: Between 2000 and 2003, millions of investors lost trillions of dollars in the stock market.

"When you invest for cash flow," my rich dad said, "you're investing in a money-back guarantee. If you invest for capital gains, you invest in hope. The biggest thief of all is hope."

Most retirement plans are based on hope and promises stretched over many years. That makes very little sense to me, yet it seems to make a lot of sense to the millions of investors who are hoping the money they expect will be there at age 65.

There's nothing wrong with capital gains. I would like my properties and stocks to go up in value, but I don't play this game that much. My primary focus, like that of most successful investors, is cash flow -- not capital gains.

Powerful Combo

The key to financial intelligence is how to use both cash flow and capital gains to grow wealthy. So many people are not successful, because they're generally focusing on only one of the two. The majority is focusing on capital gains.

In my opinion, one of the primary reasons people invest in tomorrow, rather than today, is simply because they think they cannot find or afford an investment that pays them today. As a result, they often become believers in tomorrow. These are the people who often fall prey to financial predators selling dreams of the future.

As my rich dad said, "An investment needs to make money today and tomorrow."