3 Levels to Building Your Wealth

When I was young, and my rich dad would tell me he didn’t like an investment I wanted to pursue, he’d always say, “I hope I’m wrong.” He believed that by giving me enough warning, I would have the time to prepare, just in case he was right.

He said, “The question is not whether I’m right or wrong. The question is: are you prepared just in case I’m right?”

This has stuck with me and it motivated me to prepare rather than rely on other people. Kim and I prepared in a way that led to increased financial education, experience, and eventually independence.

Our preparation has led us to a more financially secure position in life.

A giant stock-market crash is coming, but the market crash is not the problem. Predicting a market crash is not a big deal. All financial markets go up, and all financial markets come down. Market cycles are a part of life. Predicting a bull market crashing to a bear market is like predicting fall becoming winter.

The issue is that the next market crash will reveal big problems. The next crash will be especially hard because three generations have pushed a bigger problem forward—the problem of how people support themselves once their working days are over. That is an unprecedented problem that grows bigger every day.

The good news is that if you prepare it won’t matter what happens. Kim and I created the CASHFLOW board game to teach anyone how to prepare just the way we have.

Three Investment Levels

Level #1: Small Deals

On the CASHFLOW game board, small-deal investment cards and big-deal investment cards are found. When most investors start out, they start out with small deals. Of course, there is always the egotist, just as in real life, who wants to start with a big deal, even though they do not have any money.

In real life, in the early 1970s, I purchased my first piece of investment real estate. It was an $18,000 condominium on the island of Maui. Even though I did not have much money, I was able to buy three of those $18,000 condominiums by raising investor money for the down payment.

I then sold them for $48,000 each in less than a year, netting me $90,000, which was split between myself and my investors. I made more that year from my investments than I did from my job at Xerox. From that point on, I was hooked on learning to become a better investor.

In real life, Kim purchased her first investment property in 1989. It was a two-bedroom, one-bath rental home that sold for $45,000. It took a $5,000 down payment, and she made approximately $25 a month positive cash flow. Although Kim was very nervous, she gained a tremendous amount of experience that serves her well today.

Today, we continue to do a few small deals. While most people are receiving less than 2 percent taxable interest from their banks, we receive nearly a 12% effective return on our money.

Level #2: Big Deals

Once a CASHFLOW player has made some money from investing in small deals, they are now ready to take on bigger deals.

Kim and I did this in real life. After we had purchased nearly 12 small properties, we were ready to sell them through a tax-deferred 1031 exchange, which means we did not have to pay the capital-gains tax that stock investors often have to pay.

After we sold our 12 small deals, we were ready to move on to bigger deals. With the proceeds from those small deals, we purchased two larger apartment houses and were able to retire in 1994. In other words, it took Kim and me less than five years to move from small deals to big deals and retire.

After we retired, we capitalized on our experience by looking for other big deals.

Level #3: The Fast Track

As many of you know, the CASHFLOW board game has two tracks. One is the Rat Race. The second is the Fast Track. In real life, investments on the Fast Track are by law reserved only for the rich.

The following are some real-life examples of investments Kim and I have added to our ark since our retirement in 1994.

Private Placements

As entrepreneurs, we like investing in small start-up companies that have the potential to go public. Along the way, we have invested in two oil companies, one silver company, a gold company, and a consumer-products company.

One oil company ran into trouble when it failed to strike oil and ran out of money. The other oil company discovered gas and is now being acquired by a publicly listed company. The silver company was acquired by a company listed on the Toronto Stock Exchange in 2001 and is beginning to attract investor attention. It is in production and has cash flow from the ore it sells.

The gold company has secured rights to an advanced exploration project with a resource of 3 million ounces of gold. It is set to go public in 2003 through an IPO. The consumer-products company is also set to go public in 2002 through a reverse merger.

Most of these small start-up companies have taken four to five years to develop in order to get them ready to bring to the market. I wrote about this process of starting companies and getting them ready for the public markets in book number three, Rich Dad’s Guide to Investing.

I remember that after the book came out in 1999, a few people commented that I was wasting my time starting gold, silver, and oil companies. The reason was because the high-tech boom and dotcom boom were on. Today, due to changes in market conditions, gold, silver, and oil are coming back into favor.

Again, an entrepreneur must have vision and be able to build a company for a market five years out.

Going Public

The advantage to building a company and taking it public is that the founders receive the largest blocks of shares at very favorable prices, as low as two cents a share to 25 cents a share. An entrepreneur may be able to buy a substantial percentage of the company at that price.

After the stock goes public—and let’s say the share price hits $3 a share—the founders can begin to sell a few shares to recoup their initial investment and go on to reap the benefits of a growing public company.

Of course, these are the riskiest of all investments in the stock market and only the very rich or the very savvy should invest in such companies. This end of the stock market is where most of the crooks and con men hang out. That is why, if you should venture into this market, your business and investment training must be the best.

If your business and investment skills are limited, you may fall prey to these crooks and con men or, worse, become one of them.

The point in sharing our investments is not to brag, but to encourage and inspire some of you to begin your journey to greatly improve your financial education and find your way to independence, financially.

While we agree that these investments are too risky for most people, with the proper education and experience, we have found these pathways to actually be the safest and most secure.

It is not the investment that is necessarily risky. In most cases, it is the investor who is risky.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

The Daily Reckoning