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What Should I Invest In?
In 1973, I returned home from my tour of Vietnam. I felt fortunate to have
been assigned to a base in Hawaii near home rather than to a base on the East
Coast. After settling in at the Marine Corps Air Station, I called my friend Mike
and we set up a time to have lunch together with his dad, the man I call my rich
dad. Mike was anxious to show me his new baby and his new home so we agreed
to have lunch at his house the following Saturday. When Mike’s limousine came
to pick me up at the drab gray base BOQ, the Bachelor Officers’ Quarters, I began
to realize how much had changed since we had graduated together from high
school in 1965.
“Welcome home,” Mike said as I walked into the foyer of his beautiful home
with marble floors. Mike was beaming from ear to ear as he held his
seven-month-old son. “Glad you made it back in one piece.”
“So am I,” I replied as I looked past Mike at the shimmering blue Pacific
Ocean, which touched the white sand in front of his home. The home was
spectacular. It was a tropical one-level mansion with all the grace and charm of old
and new Hawaiian living. There were beautiful Persian carpets, tall dark green
potted plants, and a large pool that was surrounded on three sides by his home,
with the ocean on the fourth side. It was very open, breezy, and the model of
gracious island living with the finest of detail. The home fit my fantasies of living
the luxurious life in Hawaii.
“Meet my son James,” said Mike.
“Oh,” I said in a startled voice. My jaw must have been hanging open as I had
slipped into a trance taking in the stunning beauty of this home. “What a cute kid.”
I replied as any person should reply when looking at a new baby. But as I stood
there waving and making faces at a baby blankly staring back at me, my mind was
still in shock at how much had changed in eight years. I was living on a military
base in old barracks, sharing a room with three other messy beer-drinking young
pilots, while Mike was living in a multi-million-dollar estate with his gorgeous
wife and newborn baby.
“Come on in,” Mike continued. “Dad and Connie are waiting for us on the
patio.”
The lunch was spectacular and served by their full-time maid. I sat there
enjoying the meal, the scenery, and the company when I thought about my three
roommates who were probably dining at the officer’s mess hall at that very
moment. Since it was Saturday, lunch on the base was probably a sub sandwich
and a bowl of soup.
After the pleasantries and catching up on old times was over, rich dad said,
“As you can see, Mike has done an excellent job investing the profits from the
business. We have made more money in the last two years than I made in the first
twenty. There is a lot of truth to the statement that the first million is the hardest.”
“So business has been good?” I asked, encouraging further disclosure on how
their fortunes had jumped so radically.
“Business is excellent,” said rich dad. “These new 747s bring so many tourists
from all over the world to Hawaii that business cannot help but keep growing. But
our real success is from our investments more than our business. And Mike is in
charge of the investments.”
“Congratulations,” I said to Mike. “Well done.”
“Thank you,” said Mike. “But I can’t take all the credit. It’s dad’s investment
formula that is really working. I’m just doing exactly what he has been teaching us
about business and investing for all these years.”
“It must be paying off,” I said. “I can’t believe you live here in the richest
neighborhood in the city. Do you remember when we were poor kids, running with
our surfboards between houses trying to get to the beach?”
Mike laughed. “Yes I do. And I remember being chased by all those mean old
rich guys. Now I’m the mean old rich guy who is chasing those kids away. Who
would have ever thought that you and I would be living . . . ?”
Mike suddenly stopped talking once he realized what he was saying. He
realized that while he was living here, I was living on the other side of the island
in drabmilitary barracks.
“I’m sorry,” he said. “I . . . didn’t mean to…”
“No apologies necessary,” I said with a grin. “I’m happy for you. I’m glad
you’re so wealthy and successful. You deserve it because you took the time to
learn to run the business. I’ll be out of the barracks in a couple of years as soon as
my contract with the Marine Corps is done.”
Rich dad, sensing the tension between Mike and me, broke in and said, “And
he’s done a better job than I have. I’m very proud of him. I’m proud of both my
son and his wife. They are a great team and have earned everything they have.
Now that you’re back from the war, it’s your turn Robert.”
May I Invest With You?
“I’d love to invest with you,” I eagerly replied. “I saved nearly $3,000 while I
was in Vietnam and I’d like to invest it before I spend it. Can I invest with you?”
“Well, I’ll give you the name of a good stockbroker,” rich dad said. “I’m sure
he’ll give you some good advice, maybe even a hot tip or two.”
“No, no, no,” I said. “I want to invest in what you are investing in. Come on.
You know how long I’ve known you two. I know you’ve always got something
that you’re working on or investing in. I don’t want to go to a stockbroker. I want
to be in a deal with you guys.”
The room went silent as I waited for rich dad or Mike to respond. The silence
grew into tension.
“Did I say something wrong?” I asked finally.
“No,” said Mike. “Dad and I are investing in a couple of new projects that are
exciting but I think it is best you call one of our stockbrokers first and begin
investing with him.”
Again there was silence, punctuated only by the clinking of the dishes and
glasses as the maid cleared the table. Mike’s wife Connie excused herself and took
the baby to another room.
“I don’t understand,” I said. Turning to rich dad more than Mike, I continued,
“All these years I’ve worked right along side the two of you building your
business. I’ve worked for close to nothing. I went to college as you advised and I
fought for my country as you said a young man should. Now that I’m old enough
and I finally have a few dollars to invest, you seem to hesitate when I say I want to
invest in what you invest in. I don’t understand. Why the cold shoulder—are you
trying to snub me or push me away? Don’t you wantme to get rich like you?”
“It’s not a cold shoulder,” Mike replied. “And we would never snub you or not
wish you to attain great wealth. It’s that things are different now.”
Rich dad nodded his head in slow and silent agreement.
“We’d love to have you invest in what we invest in,” rich dad finally said.
“But it would be against the law.”
“Against the law?” I echoed in loud disbelief. “Are you two doing something
illegal?”
“No, no,” said rich dad with a chuckle. “We would never do anything illegal.
It’s too easy to get rich legally to ever risk going to jail for something illegal.”
“And it is because we want to always remain on the right side of the law that
we say it would be illegal for you to invest with us,” said Mike.
“It’s not illegal for Mike and me to invest in what we invest in. But it would
be illegal for you,” rich dad tried to summarize.
“Why?” I asked.
“Because you’re not rich,” said Mike softly and gently. “What we invest in is
for rich people only.”
Mike’s words went straight through me. Since he was my best friend, I knew
they were difficult words for him to say to me. And although he said them as
gently as possible, they still hurt and cut like a knife through my heart. I was
beginning to sense how wide the financial gap between us was. While his dad and
my dad both started out with nothing, he and his dad had achieved great wealth.
My dad and I were still from the other side of the tracks, as they say. I could sense
that this big house with the lovely white-sand beach was still far away for me, and
the distance was measured in more than miles. Leaning back in my chair and
crossing my arms in introspective thought, I sat there nodding quietly as I
summarized that moment in our lives. We were both 25 years old but in many
ways, Mike was 25 years ahead of me financially.My own dad had just been more
or less fired from his government job and he was starting over with nothing at age
52. I had not even begun.
“Are you OK?” asked rich dad gently.
“Yeah, I’m OK,” I replied, doing my best to hide the hurt that came from
feeling sorry for myself and for my family. “I’m just doing some deep thinking and
some soul searching,” I said, mustering a brave grin.
The room was silent as we listened to the waves and as the cool breeze blew
through the beautiful home. Mike, rich dad, and I sat there while I came to terms
with the message and its reality.
“So I can’t invest with you because I’m not rich,” I finally said as I came out
of my trance. “And if I did invest in what you invest in, it would be against the
law?”
Rich dad and Mike nodded. “In some instances,” Mike added.
“And who made this law?” I asked.
“The federal government,” Mike replied.
“The SEC,” rich dad added.
“The SEC?” I asked. “What is the SEC?”
“The Securities and Exchange Commission,” rich dad responded. “It was
created in the 1930s under the direction of Joseph Kennedy, father of our late
President John Kennedy.”
“Why was it created?” I asked.
Rich dad laughed. “It was created to protect the public from wild unscrupulous
dealmakers, businessmen, brokers, and investors.”
“Why do you laugh?” I asked. “It seems like that would be a good thing to
do.”
“Yes, it is a very good thing,” rich dad replied, still chuckling a little. “Prior to
the stock market crash of 1929, many shady, slippery, and shoddy investments
were being sold to the public. A lot of lying and misinformation was being put
forth. So the SEC was formed to be the watchdog. It is the agency that helps
make—as well as enforce—the rules. It serves a very important role. Without the
SEC, there would be chaos.”
“So why do you laugh?” I persisted.
“Because while it protects the public from the bad investments, it also keeps
the public out of the best investments,” replied rich dad in a more serious tone.
“So if the SEC protects the public from the worst investments and from the
best investments, what does the public invest in?” I asked.
“The sanitized investments,” rich dad replied. “The investments that follow the
guidelines of the SEC.”
“Well, what is wrong with that?” I asked.
“Nothing,” said rich dad. “I think it’s a good idea. We must have rules and
enforce the rules. The SEC does that.”
“But why the chuckle?” I asked. “I’ve known you too many years and I know
you are holding back something that is causing you to laugh.”
“I’ve already told you,” said rich dad. “I chuckle because in protecting the
public from the bad investments, the SEC also protects the public from the best
investments.”
“Which is one of the reasons the rich get richer?” I asked tenuously.
“You got it,” said rich dad. “I chuckle because I see the irony in the big
picture. People invest because they want to get rich. But because they’re not rich,
they’re not allowed to invest in the investments that could make them rich. Only if
you’re rich can you invest in a rich person’s investments. And so the rich get
richer. To me, that is ironic.”
“But why is it done this way?” I asked. “Is it to protect the poor and middle
class from the rich?”
“No, not necessarily,” Mike responded. “I think it is really to protect the poor
and the middle class from themselves.”
“Why do you say that?” I asked.
“Because there are many more bad deals than good deals. If a person is not
aware, all deals—good and bad—look the same. It takes a great deal of education
and experience to sort the more sophisticated investments into good and bad
investments. To be sophisticated means you have the ability to know what makes
one investment good and the others dangerous. And most people simply do not
have that education and experience,” said rich dad. “Mike, why don’t you bring
out the latest deal we are considering?”
Mike left the table for his office and returned with a three-ring binder that was
about two inches thick filled with pages, pictures, figures, andmaps.
“This is an example of something we would consider investing in,” said Mike
as he sat down. “It is known as a non-registered security. This particular
investment is sometimes called a private placement memorandum.”
My mind went numb as Mike flipped though the pages and showed me the
graphs, charts, maps, and pages of written text that described the risks and rewards
of the investment. I felt drowsy as Mike explained what he was looking at and why
he thought it was such a great investment opportunity.
Rich dad, seeing me begin to fade away with the overload of unfamiliar
information, stopped Mike and said, “This is what I wanted Robert to see.”
Rich dad then pointed to a small paragraph at the front of the book that read
“Exemptions from the Securities Act of 1933.”
“This is what I want you to understand,” he said.
I leaned forward to be better able to read the fine print his finger was pointing
to. The fine print said,
“This investment is for accredited investors only. An accredited investor is
generally accepted to be someone who:
has a net worth of $1 million or more; or
has had an annual income of $200,000 or more in each of the most
recent years (or $300,000 jointly with a spouse) and who has a
reasonable expectation of reaching the same income level in the
current year.”
Leaning back in my chair, I said, “This is why you say I cannot invest in what
you invest in. This investment is for rich people only.”
“Or people with high incomes,” said Mike.
“Not only are these guidelines tough, but the minimum amount you can invest
in this investment is $35,000. That is how much each investment ‘unit,’ as it is
called, costs.”
“$35,000!” I said with a gasp. “That is a lot of money and a lot of risk. You
mean that is the least someone can invest in this deal?”
Rich dad nodded. “How much does the government pay you as a Marine
Corps pilot?”
“I was earning about $12,000 a year with flight pay and combat pay in
Vietnam. I really don’t know what my pay will be here now that I am stationed in
Hawaii. I might get some COLA, cost of living allowance, but it sure isn’t going to
be much, and it certainly will not cover the cost of living in Hawaii.”
“So for you to have saved $3,000 was quite an accomplishment,” said rich
dad, doing his best to cheer me up. “You saved nearly 25% of your gross income.”
I nodded yet silently I realized how very, very far behind I was from becoming
a so-called accredited investor. I realized that even if I became a General in the
Marine Corps, I would probably not earn enough money to be considered an
accredited investor. Not even the president of the United States, unless he or she
were already rich, could qualify on salary alone.
“So what should I do?” I finally asked. “Why can’t I just give you my $3,000
and you combine it with your money and we split the profits when the deal pays
off?”
“We could do that,” said rich dad. “But I wouldn’t recommend it. Not for you
anyway.”
“Why?” I asked. “Why not for me?”
“You already have a pretty good financial education foundation. So you can
go way beyond just being an accredited investor. If you want, you could become a
sophisticated investor. Then you will find wealth far beyond your wildest dreams.”
“Accredited investor? Sophisticated investor? What’s the difference?” I asked,
actually feeling a spark of renewed hope.
“Good question,” Mike said with a smile, sensing that his friend was coming
out of a slump.
“An accredited investor is by definition someone who qualifies because he or
she has money. That is why an accredited investor is often called a qualified
investor,” rich dad explained. “But money alone does not qualify you to be a
sophisticated investor.”
“What is the difference?” I asked.
“Well, did you see the headlines in yesterday’s newspaper about the
Hollywood movie star who lost millions in an investment scam?” asked rich dad.
I nodded my head saying, “Yes I did. Not only did he lose millions, he had to
pay the tax department for untaxed income that went into that deal.”
“Well, that is an example of an accredited or qualified investor,” rich dad
continued. “But just because you have money does not mean you’re a
sophisticated investor. This is why we often hear of so many high-income people
such as doctors, lawyers, rock stars, and professional athletes losing money in
less-than-sound investments. They have the money but they lack the
sophistication. They have money but don’t know how to invest it safely and for
high returns. All the deals look the same to them. They can’t tell a good
investment from a bad one. People like them should stay only in sanitized
investments or hire a professional money manager they trust to invest for them.”
“So what is your definition of a sophisticated investor?” I asked.
“A sophisticated investor knows the 3-Es,” said rich dad.
“The 3-Es,” I repeated. “What are the 3-Es?”
Rich dad then turned over the private placement memorandum we were
looking at and wrote the following on the back of one of the pages.
1. Education
2. Experience
3. Excessive cash
“Those are the 3-Es,” he said, looking up from the page. “Achieve those three
items and you will be a sophisticated investor.”
Looking at the three items, I said, “So the movie star had excessive cash, but
he lacked the first two items.”
Rich dad nodded. “And there are many people with the right education but
they lack the experience, and without real life experience, they often lack the
excessive cash.”
“People like that often say, ‘I know’ when you explain things to them, but they
do not do what they know,” added Mike. “Our banker always says, ‘I know’ to
what dad and I do, but for some reason, he does not do what he claims he knows.”
“And that is why your banker lacks the excessive cash,” I said.
Rich dad and Mike nodded.
Again, the room went silent as the conversation ended. All three of us were
deep in our own private thoughts. Rich dad signaled the maid for more coffee and
Mike began putting the three-ring binder away. I sat with my arms crossed, gazing
out upon the deep blue Pacific Ocean at Mike’s beautiful home and contemplating
my next direction in life. I had finished college as my parents had wished, my
military obligation would soon be over, and then I would be free to choose the
path that was best for me.
“What are you thinking about?” asked rich dad, sipping from his fresh cup of
coffee.
“I’m thinking about what I want to become now that I have grown up,” I
replied.
“And what is that?” askedMike.
“I’m thinking that maybe I should become a sophisticated investor,” I replied
quietly. “Whatever that is.”
“That would be a wise choice,” said rich dad. You’ve got a pretty good start, a
financial education foundation. Now it’s time to get some experience.”
“And how will I know when I have enough of both?” I asked.
“When you have excessive cash,” smiled rich dad.
With that, the three of us laughed and raised our water glasses, toasting, “To
excessive cash.”
Rich dad then toasted, “And to being a sophisticated investor.”
“To being a sophisticated investor and to excessive cash,” I repeated again
silently tomyself. I liked the ring of those words in my head.
Mike’s limousine driver was summoned and I returned to my dingy bachelor
officers quarters to think about what I was going to do with the rest of my life. I
was an adult and I had fulfilled my parents’ expectations . . . expectations such as
getting a college education and serving my country during a time of war. It was
now time for me to decide what I wanted to do for myself. The thought of studying
to become a sophisticated investor appealed to me. I could continue my education
with rich dad as I gained the experience I needed. This time, my rich dad would be
guiding me as an adult.
In 1973, I returned home from my tour of Vietnam. I felt fortunate to have
been assigned to a base in Hawaii near home rather than to a base on the East
Coast. After settling in at the Marine Corps Air Station, I called my friend Mike
and we set up a time to have lunch together with his dad, the man I call my rich
dad. Mike was anxious to show me his new baby and his new home so we agreed
to have lunch at his house the following Saturday. When Mike’s limousine came
to pick me up at the drab gray base BOQ, the Bachelor Officers’ Quarters, I began
to realize how much had changed since we had graduated together from high
school in 1965.
“Welcome home,” Mike said as I walked into the foyer of his beautiful home
with marble floors. Mike was beaming from ear to ear as he held his
seven-month-old son. “Glad you made it back in one piece.”
“So am I,” I replied as I looked past Mike at the shimmering blue Pacific
Ocean, which touched the white sand in front of his home. The home was
spectacular. It was a tropical one-level mansion with all the grace and charm of old
and new Hawaiian living. There were beautiful Persian carpets, tall dark green
potted plants, and a large pool that was surrounded on three sides by his home,
with the ocean on the fourth side. It was very open, breezy, and the model of
gracious island living with the finest of detail. The home fit my fantasies of living
the luxurious life in Hawaii.
“Meet my son James,” said Mike.
“Oh,” I said in a startled voice. My jaw must have been hanging open as I had
slipped into a trance taking in the stunning beauty of this home. “What a cute kid.”
I replied as any person should reply when looking at a new baby. But as I stood
there waving and making faces at a baby blankly staring back at me, my mind was
still in shock at how much had changed in eight years. I was living on a military
base in old barracks, sharing a room with three other messy beer-drinking young
pilots, while Mike was living in a multi-million-dollar estate with his gorgeous
wife and newborn baby.
“Come on in,” Mike continued. “Dad and Connie are waiting for us on the
patio.”
The lunch was spectacular and served by their full-time maid. I sat there
enjoying the meal, the scenery, and the company when I thought about my three
roommates who were probably dining at the officer’s mess hall at that very
moment. Since it was Saturday, lunch on the base was probably a sub sandwich
and a bowl of soup.
After the pleasantries and catching up on old times was over, rich dad said,
“As you can see, Mike has done an excellent job investing the profits from the
business. We have made more money in the last two years than I made in the first
twenty. There is a lot of truth to the statement that the first million is the hardest.”
“So business has been good?” I asked, encouraging further disclosure on how
their fortunes had jumped so radically.
“Business is excellent,” said rich dad. “These new 747s bring so many tourists
from all over the world to Hawaii that business cannot help but keep growing. But
our real success is from our investments more than our business. And Mike is in
charge of the investments.”
“Congratulations,” I said to Mike. “Well done.”
“Thank you,” said Mike. “But I can’t take all the credit. It’s dad’s investment
formula that is really working. I’m just doing exactly what he has been teaching us
about business and investing for all these years.”
“It must be paying off,” I said. “I can’t believe you live here in the richest
neighborhood in the city. Do you remember when we were poor kids, running with
our surfboards between houses trying to get to the beach?”
Mike laughed. “Yes I do. And I remember being chased by all those mean old
rich guys. Now I’m the mean old rich guy who is chasing those kids away. Who
would have ever thought that you and I would be living . . . ?”
Mike suddenly stopped talking once he realized what he was saying. He
realized that while he was living here, I was living on the other side of the island
in drabmilitary barracks.
“I’m sorry,” he said. “I . . . didn’t mean to…”
“No apologies necessary,” I said with a grin. “I’m happy for you. I’m glad
you’re so wealthy and successful. You deserve it because you took the time to
learn to run the business. I’ll be out of the barracks in a couple of years as soon as
my contract with the Marine Corps is done.”
Rich dad, sensing the tension between Mike and me, broke in and said, “And
he’s done a better job than I have. I’m very proud of him. I’m proud of both my
son and his wife. They are a great team and have earned everything they have.
Now that you’re back from the war, it’s your turn Robert.”
May I Invest With You?
“I’d love to invest with you,” I eagerly replied. “I saved nearly $3,000 while I
was in Vietnam and I’d like to invest it before I spend it. Can I invest with you?”
“Well, I’ll give you the name of a good stockbroker,” rich dad said. “I’m sure
he’ll give you some good advice, maybe even a hot tip or two.”
“No, no, no,” I said. “I want to invest in what you are investing in. Come on.
You know how long I’ve known you two. I know you’ve always got something
that you’re working on or investing in. I don’t want to go to a stockbroker. I want
to be in a deal with you guys.”
The room went silent as I waited for rich dad or Mike to respond. The silence
grew into tension.
“Did I say something wrong?” I asked finally.
“No,” said Mike. “Dad and I are investing in a couple of new projects that are
exciting but I think it is best you call one of our stockbrokers first and begin
investing with him.”
Again there was silence, punctuated only by the clinking of the dishes and
glasses as the maid cleared the table. Mike’s wife Connie excused herself and took
the baby to another room.
“I don’t understand,” I said. Turning to rich dad more than Mike, I continued,
“All these years I’ve worked right along side the two of you building your
business. I’ve worked for close to nothing. I went to college as you advised and I
fought for my country as you said a young man should. Now that I’m old enough
and I finally have a few dollars to invest, you seem to hesitate when I say I want to
invest in what you invest in. I don’t understand. Why the cold shoulder—are you
trying to snub me or push me away? Don’t you wantme to get rich like you?”
“It’s not a cold shoulder,” Mike replied. “And we would never snub you or not
wish you to attain great wealth. It’s that things are different now.”
Rich dad nodded his head in slow and silent agreement.
“We’d love to have you invest in what we invest in,” rich dad finally said.
“But it would be against the law.”
“Against the law?” I echoed in loud disbelief. “Are you two doing something
illegal?”
“No, no,” said rich dad with a chuckle. “We would never do anything illegal.
It’s too easy to get rich legally to ever risk going to jail for something illegal.”
“And it is because we want to always remain on the right side of the law that
we say it would be illegal for you to invest with us,” said Mike.
“It’s not illegal for Mike and me to invest in what we invest in. But it would
be illegal for you,” rich dad tried to summarize.
“Why?” I asked.
“Because you’re not rich,” said Mike softly and gently. “What we invest in is
for rich people only.”
Mike’s words went straight through me. Since he was my best friend, I knew
they were difficult words for him to say to me. And although he said them as
gently as possible, they still hurt and cut like a knife through my heart. I was
beginning to sense how wide the financial gap between us was. While his dad and
my dad both started out with nothing, he and his dad had achieved great wealth.
My dad and I were still from the other side of the tracks, as they say. I could sense
that this big house with the lovely white-sand beach was still far away for me, and
the distance was measured in more than miles. Leaning back in my chair and
crossing my arms in introspective thought, I sat there nodding quietly as I
summarized that moment in our lives. We were both 25 years old but in many
ways, Mike was 25 years ahead of me financially.My own dad had just been more
or less fired from his government job and he was starting over with nothing at age
52. I had not even begun.
“Are you OK?” asked rich dad gently.
“Yeah, I’m OK,” I replied, doing my best to hide the hurt that came from
feeling sorry for myself and for my family. “I’m just doing some deep thinking and
some soul searching,” I said, mustering a brave grin.
The room was silent as we listened to the waves and as the cool breeze blew
through the beautiful home. Mike, rich dad, and I sat there while I came to terms
with the message and its reality.
“So I can’t invest with you because I’m not rich,” I finally said as I came out
of my trance. “And if I did invest in what you invest in, it would be against the
law?”
Rich dad and Mike nodded. “In some instances,” Mike added.
“And who made this law?” I asked.
“The federal government,” Mike replied.
“The SEC,” rich dad added.
“The SEC?” I asked. “What is the SEC?”
“The Securities and Exchange Commission,” rich dad responded. “It was
created in the 1930s under the direction of Joseph Kennedy, father of our late
President John Kennedy.”
“Why was it created?” I asked.
Rich dad laughed. “It was created to protect the public from wild unscrupulous
dealmakers, businessmen, brokers, and investors.”
“Why do you laugh?” I asked. “It seems like that would be a good thing to
do.”
“Yes, it is a very good thing,” rich dad replied, still chuckling a little. “Prior to
the stock market crash of 1929, many shady, slippery, and shoddy investments
were being sold to the public. A lot of lying and misinformation was being put
forth. So the SEC was formed to be the watchdog. It is the agency that helps
make—as well as enforce—the rules. It serves a very important role. Without the
SEC, there would be chaos.”
“So why do you laugh?” I persisted.
“Because while it protects the public from the bad investments, it also keeps
the public out of the best investments,” replied rich dad in a more serious tone.
“So if the SEC protects the public from the worst investments and from the
best investments, what does the public invest in?” I asked.
“The sanitized investments,” rich dad replied. “The investments that follow the
guidelines of the SEC.”
“Well, what is wrong with that?” I asked.
“Nothing,” said rich dad. “I think it’s a good idea. We must have rules and
enforce the rules. The SEC does that.”
“But why the chuckle?” I asked. “I’ve known you too many years and I know
you are holding back something that is causing you to laugh.”
“I’ve already told you,” said rich dad. “I chuckle because in protecting the
public from the bad investments, the SEC also protects the public from the best
investments.”
“Which is one of the reasons the rich get richer?” I asked tenuously.
“You got it,” said rich dad. “I chuckle because I see the irony in the big
picture. People invest because they want to get rich. But because they’re not rich,
they’re not allowed to invest in the investments that could make them rich. Only if
you’re rich can you invest in a rich person’s investments. And so the rich get
richer. To me, that is ironic.”
“But why is it done this way?” I asked. “Is it to protect the poor and middle
class from the rich?”
“No, not necessarily,” Mike responded. “I think it is really to protect the poor
and the middle class from themselves.”
“Why do you say that?” I asked.
“Because there are many more bad deals than good deals. If a person is not
aware, all deals—good and bad—look the same. It takes a great deal of education
and experience to sort the more sophisticated investments into good and bad
investments. To be sophisticated means you have the ability to know what makes
one investment good and the others dangerous. And most people simply do not
have that education and experience,” said rich dad. “Mike, why don’t you bring
out the latest deal we are considering?”
Mike left the table for his office and returned with a three-ring binder that was
about two inches thick filled with pages, pictures, figures, andmaps.
“This is an example of something we would consider investing in,” said Mike
as he sat down. “It is known as a non-registered security. This particular
investment is sometimes called a private placement memorandum.”
My mind went numb as Mike flipped though the pages and showed me the
graphs, charts, maps, and pages of written text that described the risks and rewards
of the investment. I felt drowsy as Mike explained what he was looking at and why
he thought it was such a great investment opportunity.
Rich dad, seeing me begin to fade away with the overload of unfamiliar
information, stopped Mike and said, “This is what I wanted Robert to see.”
Rich dad then pointed to a small paragraph at the front of the book that read
“Exemptions from the Securities Act of 1933.”
“This is what I want you to understand,” he said.
I leaned forward to be better able to read the fine print his finger was pointing
to. The fine print said,
“This investment is for accredited investors only. An accredited investor is
generally accepted to be someone who:
has a net worth of $1 million or more; or
has had an annual income of $200,000 or more in each of the most
recent years (or $300,000 jointly with a spouse) and who has a
reasonable expectation of reaching the same income level in the
current year.”
Leaning back in my chair, I said, “This is why you say I cannot invest in what
you invest in. This investment is for rich people only.”
“Or people with high incomes,” said Mike.
“Not only are these guidelines tough, but the minimum amount you can invest
in this investment is $35,000. That is how much each investment ‘unit,’ as it is
called, costs.”
“$35,000!” I said with a gasp. “That is a lot of money and a lot of risk. You
mean that is the least someone can invest in this deal?”
Rich dad nodded. “How much does the government pay you as a Marine
Corps pilot?”
“I was earning about $12,000 a year with flight pay and combat pay in
Vietnam. I really don’t know what my pay will be here now that I am stationed in
Hawaii. I might get some COLA, cost of living allowance, but it sure isn’t going to
be much, and it certainly will not cover the cost of living in Hawaii.”
“So for you to have saved $3,000 was quite an accomplishment,” said rich
dad, doing his best to cheer me up. “You saved nearly 25% of your gross income.”
I nodded yet silently I realized how very, very far behind I was from becoming
a so-called accredited investor. I realized that even if I became a General in the
Marine Corps, I would probably not earn enough money to be considered an
accredited investor. Not even the president of the United States, unless he or she
were already rich, could qualify on salary alone.
“So what should I do?” I finally asked. “Why can’t I just give you my $3,000
and you combine it with your money and we split the profits when the deal pays
off?”
“We could do that,” said rich dad. “But I wouldn’t recommend it. Not for you
anyway.”
“Why?” I asked. “Why not for me?”
“You already have a pretty good financial education foundation. So you can
go way beyond just being an accredited investor. If you want, you could become a
sophisticated investor. Then you will find wealth far beyond your wildest dreams.”
“Accredited investor? Sophisticated investor? What’s the difference?” I asked,
actually feeling a spark of renewed hope.
“Good question,” Mike said with a smile, sensing that his friend was coming
out of a slump.
“An accredited investor is by definition someone who qualifies because he or
she has money. That is why an accredited investor is often called a qualified
investor,” rich dad explained. “But money alone does not qualify you to be a
sophisticated investor.”
“What is the difference?” I asked.
“Well, did you see the headlines in yesterday’s newspaper about the
Hollywood movie star who lost millions in an investment scam?” asked rich dad.
I nodded my head saying, “Yes I did. Not only did he lose millions, he had to
pay the tax department for untaxed income that went into that deal.”
“Well, that is an example of an accredited or qualified investor,” rich dad
continued. “But just because you have money does not mean you’re a
sophisticated investor. This is why we often hear of so many high-income people
such as doctors, lawyers, rock stars, and professional athletes losing money in
less-than-sound investments. They have the money but they lack the
sophistication. They have money but don’t know how to invest it safely and for
high returns. All the deals look the same to them. They can’t tell a good
investment from a bad one. People like them should stay only in sanitized
investments or hire a professional money manager they trust to invest for them.”
“So what is your definition of a sophisticated investor?” I asked.
“A sophisticated investor knows the 3-Es,” said rich dad.
“The 3-Es,” I repeated. “What are the 3-Es?”
Rich dad then turned over the private placement memorandum we were
looking at and wrote the following on the back of one of the pages.
1. Education
2. Experience
3. Excessive cash
“Those are the 3-Es,” he said, looking up from the page. “Achieve those three
items and you will be a sophisticated investor.”
Looking at the three items, I said, “So the movie star had excessive cash, but
he lacked the first two items.”
Rich dad nodded. “And there are many people with the right education but
they lack the experience, and without real life experience, they often lack the
excessive cash.”
“People like that often say, ‘I know’ when you explain things to them, but they
do not do what they know,” added Mike. “Our banker always says, ‘I know’ to
what dad and I do, but for some reason, he does not do what he claims he knows.”
“And that is why your banker lacks the excessive cash,” I said.
Rich dad and Mike nodded.
Again, the room went silent as the conversation ended. All three of us were
deep in our own private thoughts. Rich dad signaled the maid for more coffee and
Mike began putting the three-ring binder away. I sat with my arms crossed, gazing
out upon the deep blue Pacific Ocean at Mike’s beautiful home and contemplating
my next direction in life. I had finished college as my parents had wished, my
military obligation would soon be over, and then I would be free to choose the
path that was best for me.
“What are you thinking about?” asked rich dad, sipping from his fresh cup of
coffee.
“I’m thinking about what I want to become now that I have grown up,” I
replied.
“And what is that?” askedMike.
“I’m thinking that maybe I should become a sophisticated investor,” I replied
quietly. “Whatever that is.”
“That would be a wise choice,” said rich dad. You’ve got a pretty good start, a
financial education foundation. Now it’s time to get some experience.”
“And how will I know when I have enough of both?” I asked.
“When you have excessive cash,” smiled rich dad.
With that, the three of us laughed and raised our water glasses, toasting, “To
excessive cash.”
Rich dad then toasted, “And to being a sophisticated investor.”
“To being a sophisticated investor and to excessive cash,” I repeated again
silently tomyself. I liked the ring of those words in my head.
Mike’s limousine driver was summoned and I returned to my dingy bachelor
officers quarters to think about what I was going to do with the rest of my life. I
was an adult and I had fulfilled my parents’ expectations . . . expectations such as
getting a college education and serving my country during a time of war. It was
now time for me to decide what I wanted to do for myself. The thought of studying
to become a sophisticated investor appealed to me. I could continue my education
with rich dad as I gained the experience I needed. This time, my rich dad would be
guiding me as an adult.
