Tuesday, February 28, 2012

Robert Kiyosaki and his principles / teachings - do they make true business sense to an MBA?

"Don’t work hard for money;
Instead, have money work hard for you"
- Robert Kiyosaki.

I have been a fan of Robert Kiyosaki for almost a decade now - after reading his book "Rich Dad, Poor Dad". To me, as a non-MBA, then, it made me curious about Financial Literacy.

After I began my MBA, I now begin to wonder how much of it is true and how much false. I would love to do an analysis in one of my future posts about this topic. Some of his thoughts - like the cash flow quadrant, however, do make sense.

If I apply his thoughts to MBAs who graduate from business schools, I get the feeling that this could translate to: "Rich MBA, Poor MBA", LOL :)))

Here are some relevant videos:


As per Kiyosaki's teachings, there are 4 types of people: E, S, B & I. (Employees, Self Employed, Business owners & Investors). And their thinking / psychology is as below: 
  • Employees: "I am looking for a safe secure job with benefits". Core value --> Security.
  • Self Employed / Small Business owners / Solo: "If you wan't it done right, do it by yourself".
  • Big Business Owners: "Good system, good network, smartest people I know, to help run my business." They do not want to run their companies themselves; They want smart people to run their companies for them.
  • Investors: These people make money work for them (not people work for them - like in the other 3 categories.)

The 2 dads had 2 different sets of values and advise.
  • What the Poor Dad said: Go to school, get good grades, get a high paying job, work hard, live below your means, save money, get out of debt, have a good retirement plan.

  • What the Rich Dad said: That (stuff said by the poor dad) will not make you rich! Get into business. Generate assets that will last for a long time and you can even pass on to your next generation. (But if your are on a job, you don't own anything and you could get fired at any time)
I have attended a seminar of his in the past for Stock trading and that made some sense to me. I was taught about the basics of Stock trading, which I found helpful. His notes and hand outs were good too. Plus I have attended a seminar of his about Real Estate, which was not too bad either.

One thing is for sure - Kiyosaki and team are masters of Marketing. They know how to sell their books, their seminars, their courses and their products well - mostly to the layman who has no much knowledge of business priniciples. And they do a goood job too. But the problem is that not everyone who attends the seminars eventually goes on to use the principles. I know quite a few such people.
I found some more information at this link: http://nat-n-hatch.com/tag/rich-dad-poor-dad/ . And I quote below:

  • According to Rich Dad (and Poor Dad), there are two main types of income: Earned income & Residual income (including passive income and portfolio income). 
  • Your earned income is what you earn by working. Your job, for example, is an earned income. If you stop working (quit, are let go, etc), you will stop earning that income. 
  • Residual income is what your earn with not direct involvement from you. Of course, you need an initial effort, but once it's going good, it's going, and doesn't stop (usually). A good example of a passive income is income derived from real estate or from your paper assets (bonds, mutual funds,etc).  
  • Residual income can be difficult to create, and the key is to be alert for residual income opportunities.
  • The other main discrepancy between Rich Dad and Poor Dad is that Rich Dad will spend his money on assets while Poor Dad will spend his money on liabilities, without understanding the difference. For example, while a new car is an asset to Poor Dad, that same new car is a liability to Rich Dad. This is the reasoning behind it: 
  • An Asset is something that will pay you back, by producing income. 
  • A Liability is something that will cost you money, by causing expenditures. 
  • So when you buy a new car, what happens? You spend money. Similarly, when you purchase a new house in the suburbs or a new TV, you spend money, by creating a monthly mortgage payment or monthly credit card payments. And as people make more money, they tend to buy more goods and services on credit, increasing the amount of debts. 
  • This is where investing in other types of assets become interesting - the residual income. You need to purchase assets that will create a streaming income. Over time that residual income will become greater than you earned income (job), allowing you to become independently wealthy. 
There is more useful information at another link as below:

Kiyosaki draws boxes to represent your cash flow (income and expenses) and balance sheet (assets and liabilities). He shows the relative sizes of each of these for his three groups of people, but one picture in particular really struck a chord with me. It’s labeled as "Why the Rich get Richer?", and here is a simplified version of it, below:
Why the Rich ger Richer...
If you have an asset, then it is generating income for you. With this income you can buy more assets, which generate more income, so that you can buy more assets, which in turn generate even more income! Wow! It is a system with positive feedback.
More points from the link above:
  • Rich Dad’s Lesson #1 “The poor and the middle class work for money. The rich have money work for them.” 
  • Assets put money into your pocket,
  • Liabilities take money out of your pocket.
  • The rich buy assets
  • The poor only have expenses
  • The middle class buys liabilities they think are assets (house, car, furnishings, boat etc)
  • The problem many people have is that they focus too much on generating income instead of focusing on buying income generating assets
  • The advantages of forming a corporation, namely tax advantages and protection of personal assets.
  • Kiyosaki makes the argument, that you should choose jobs based on what you can learn from them, not how much money you can make.
Five reasons why people don’t get rich:
  1. Fear
  2. Cynicism
  3. Laziness
  4. Bad habits
  5. Arrogance
Kiyosaki gives 10 steps to develop your financial genius:
  1. Have a reason greater than reality.
  2. Choose daily.
  3. Choose friends carefully. This is good advice, since you tend to drift towards acting like those you associate with.
  4. Master a formula and then learn a new one.
  5. Pay yourself first. You have got to have assets, and if you don’t stash away the cash right as soon as you get it, you will probably spend it.
  6. Pay your brokers well.
  7. Be an Indian giver.
  8. Assets buy luxuries. Kiyosaki is advocating delayed gratification, waiting until your assets generate enough money to pay for the luxuries, instead of buying them right away when you want them.
  9. The need for heroes. Kiyosaki says his heroes are golf players and financial top dogs.
  10. Teach and you shall receive. I think this is probably the best advice of the chapter. When you try to teach a subject, you are forced to think more deeply about it. When you can’t explain something and are faced with honest probing questions, you realize exactly where the weak points in your understanding are. The best reason to teach is really to learn.
    - unquote -
So what is my verdict? sorry to disappoint you, but I do not want to take a stand just yet. I need to do some more research before I take a stand.

It is true that to the masses, Kiyosaki's teachings do make a lot of sense. Before starting the MBA program, I was in awe of his books and did learn a few things. There is a lot of negative talk about him in general, with the mention that he is just a good marketer and it is all about gimmicks, trying to sell his expensive products.

I guess the consumers have to be prudent about spending on courses. But his original book the Rich Dad, Poor Dad, is certainly worth a read for anybody and everybody!

But with regards to Direct Selling business. I do not agree with Kiyosaki. Not everybody can make it - in practical terms. The failure rate is pretty high. I am not saying that the model is wrong. What I mean is that it is not possible for every single individual participating in direct selling to make big bucks - the number of drop outs and failures speak for themselves. However, there are people who are socially active who do go on to become successful.

Another thing that I disagree with, is that Kiyosaki tends to downplay the contribution of employees. Employees of corporations run the world and provide us with most of the services. Being an employee is not shameful. There are companies that take good care of their employees and pay them well. The residual income from employment salaries can be invested to generate passive income - that is possible too.

- Gerry.

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