Since I graduated college at age 22, I have been following many of the rules of prudent living. I have been “investing” ten percent of my income into a 401(k) account. Additionally, I have been fortunate enough to save an additional 10 or 20 percent over the years and “invest” these into mutual funds, stocks, US Treasury notes, certificates of deposit and other paper investments. Most of my assets were name brand stocks, the S&P 500, target date mutual funds etc. Pretty basic stuff. Nevertheless, I considered this “investing”.
Last week I had an epiphany. While reading Robert Kiyosaki’s book “Rich Dad’s Guide to Investing”, I learned that I am not really an investor, but merely a saver. There is a significant difference. I had come from the train of thought that to get ahead fianncially, I needed to put aside as much as possible for a long period of time and at the end of the day, I will be wealthy. While I have succeeded in putting a significant amount of my income aside over the years, my investments have never really earned much of a return. Under my approach investing in name brand stocks, bonds and mutual funds, my assets could never really do much more than mimic the market. I had no control over any of the assets in which I had invested. Furthermore, there are always, middlemen, brokerage companies, custodians, etc. ready to skim a little off the top for their own pocket.
Here is how Mr. Kiyosaki defines a saver:
“These people save small amounts of money in low-risk, low return vehicles such as fixed deposits. The prefer saving money rather than investing it. They don’t like being in debt and not willing to take any financial risks. Savers spend their time trying to save pennies instead of learning how to invest it. In times of inflation they end up being losers.”
This pretty much defined me to a tee. Sometimes the truth hurts, but I am glad I learned this at 38 years old than to never have learned it at all. According to Mr. Kiyosaki, a true investor spends his time looking for ways to get his / her assets to earn more money. To increase investment returns and minimize risk at the same time, you need to understand the various ways to control investments. The more of these investor controls you have the more likely your returns will increase. Here are the ten investor controls that Mr. Kiyosaki discusses with some excerpts thereon:
1. The control over yourself – Being financially literate and understanding your personal financial statement.
2. The control over income/expense and asset/liability ratios – The wealthy gain control over their expenses and focus on acquiring or building assets. Their businesses pay most of their expenses, and they have few, if any, personal liabilities.
3. The control over the management of the investment – The ability to control and choose the management of the company.
4. The control over taxes – One can influence the type of income generated (passive vs. active), timing of the income, etc.
5. The control over when you buy and when you sell
6. The control over brokerage transactions
7. The control over the E-T-C (entity, timing, characteristics) – There are significant benefits to choosing the right type of entity, the right year end and converting as much income into passive and portfolio income as possible.
8. The control over the terms and conditions of the agreements
9. The control over access to information – Insiders can obtain more information than outsiders.
10. The control over giving it back, philanthropy, redistribution of wealth
Mostly these controls are obtained by being directly involved in a small or medium sized business. (If you want further information or details of these investor controls, they are further defined at this webpage.)
If you think about Warren Buffett, often referred to the world’s greatest investor, he maintains many or all of these controls in his investments. He often buys entire companies or significant blocks of the company. This allows him to influence / control the investment. It is because of this that he has earned returns of over 20 percent per annum. Additionally, he will tell you that he believes his company Berkshire Hathaway has done this without the need to take on significant risk.
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