Chuck Ponzi January 24th, 2006

If anyone has ever had more of an underlying influence on the mania of real estate in the US, one could argue that man would be Robert Kiyosaki, the author of Rich Dad Poor Dad.

Many now doubt whether much of anything in the book is really true. Was he a millionaire? Why did he go bankrupt? Did he even go bankrupt? After you read the book, I recommend reading John T. Reed’s analysis of him and the book. It will give you another impression of what is truly going on with Mr. Kiyosaki.

I have read the book cover to cover several times. While it makes a good read, I wouldn’t rely on it for financial advice. Much of his advice is steeped in doublespeak, he contradicts himself numerous times, and even offers quite a bit of advice that is ILLEGAL or TAX EVASION. I would not recommend anyone trying what he claims he has tried. I also doubt that he has done half of the stuff he says he has in his book.

But, you have to admit that he is a lucky marketer, and has made a bundle of money off of telling people that they can be rich if they take risks. However, he fails to mention that many people end up poor because of risks. That the last 30 years of risk-taking has been actually very rewarding does not mean that it will stay the same for the next 30. And, quite possibly, we could see a slow deflationary period due to globalization.

Robert Kiyosaki has been a cheerleader for the real estate industry, by promoting the fallacies of real estate investing. This is exactly why I was quite surprised when I saw an article from him titled Smart Investing Amidst Real Estate Mania.

I wasn’t shocked enough until I read some of the contents.

We all know a real estate crash coming. The problem is we don’t know when.

One of the problems that I have with him after putting my finger on it is that he is quite good at making people feel good about themselves, and develops a cult of personality. I like making people feel good about themselves, but not at the expense of rational thought.

I estimate that 90% of all investors invest for price movement, not value. If prices begin to escalate, as they did in real estate from 2000 to 2004, amateurs turn pro and begin buying real estate to flip — for example, buying a home for $200,000 and then selling it for $250,000 a few months later. Most stock market investors do the same thing. In investor language, flipping is known as “the greater fool theory of investing” — you’re buying something not to own, but in the hope of selling it to someone who’s a greater fool than you.

OK, he has mixed up his terms here. The thought that “most investors invest for price movement, not value” is probably one of the worst overgeneralizations he could make. He might as well say that the stock market has no value, only percieved value. Not true, unless you don’t understand that stock certificates is actual ownership in the company: ownership of profits after interest and taxes.

He also draws some really bad inferences; he’s essentially undereducated. Perhaps if you followed the NASDAQ’s rise and fall, you might agree with the greater fool theory, but there is most certainly some intrinsic value to stocks. Value investing is when a person buys because the price falls below that intrinsic value. Speculation is what happens when buy above that intrinsic value in the hopes that it goes even higher (this is the greater fool theory), or essentially that no matter how high you pay for something, there will always be someone out there even more disconnected from the intrinsic value who will buy it. Strong belief in the greater fool theory is the source of manias. It is psychological, not systemic.

Take some more of his advice.

Although a crash is the best time to buy, the market’s high pessimism also makes it a tough time to do so. I remember buying gold at $275 an ounce in the late 1990s. Although I knew it was a great value at that price, the so-called experts were calling gold a “dog” and advised that everyone should be in high-tech and dot-com stocks. Today, with gold above $500 an ounce, those same experts are now recommending gold as a percentage of a well-diversified portfolio. Talk about expensive advice.

If by “tough” he means “easy”, then he may be right. When would it be “tough” to buy gold? Maybe when the US government says it is illegal to hold it, perhaps? If he means psychologically tough, we might agree, but that means that you’re a momentum investor, that you jump on the bandwagon as it’s leaving the gates. And, that “great investment” he’s referring to of gold? I’ll admit, it returned just over 10% during that time. But, that followed on nearly 25 years of deflation from $800 per ounce. At what point do you call a bottom? There’s a name on Wall Street for an investor who buys at the bottom and sells at the top “LIAR”.

But, at least we can agree on one thing:

So the lesson is: Now, more than ever, it’s important to focus on value, not price. When prices are low, finding value is easy. When prices are high, value is a lot harder to find — which means you need to be smarter, more cautious, and resist your knee-jerk reactions. A final word from Warren Buffett: “It’s only when the tide goes out that you learn who’s been swimming naked.” In my opinion, there are many naked swimmers, especially in the real estate market.

We will find out just how many naked swimmers there are in real estate in the next few years. And, I’m happy to see that Mr. Kiyosaki has “called the top”, even if he’s just jumping on the bandwagon.

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