I know, I keeping talking about so-called "gurus" and their terrible advice. Today I was fully prepared to discuss other topics of interest, including some general success methods and a little chat about the history of hedge funds. All of that was put aside when I read the latest Robert Kiyosaki article on Yahoo! Finance.
I was raised Republican. I voted Republican. I believed that I truly was Republican. I honestly thought that free markets work and that everyone should be left to their own decisions. But as I age I find myself swinging more and more to the Democrats. I'm realizing that many people are truly idiots. They should not be making their own decisions, because they'll just end up hanging themselves. We live in a nation where a company that was founded to sell computers to the poor at insane rates, has now expanded it's line-up to include plasma TVs!
Today I beginning to believe that many (if not most) people are idiots. So when I see something that's utter ridiculous in an article written by a self-proclaimed "investor, entrepreneur and educator", it dawns on me that there are people out there who won't realize the foolishness. Who will make life-changing decisions based on his fallacies. And I worry.
Interestingly enough, Robert's article begins with a retraction. Of sorts. You see, the last article he wrote, about how horrible mutual funds are (see my post, 4 Lies That Gurus Tell You) wasn't really written by him. And you see, he wasn't really telling the truth either. Oh, he wasn't lying, he was simply joking. Of course smart readers would have recognized the joke. You're not a dumb reader, are you?
Maybe he was joking, and I have no conclusive evidence that leads me to my own personal conclusions that his article was so incorrect, and received so much heat, that he had to distance himself from those opinions. So not only is it a joke, but it's a joke that someone else wrote...
Then he begins a new article, and ends up committing a serious logical inconsistency that completely reverses his arguments. In other words, he actually proves himself wrong. Let's see if you can catch it:
Let's break this down to spot where he loses his train of thought. He begins by explaining that debt holds a higher priority than equity, thus making it a safer investment. He's correct in this. When something goes wrong, the first people to cash out are the debt holders. There's an anecdote from Liar's Poker about an investor and a bond trader. The investor makes some comment about owning a company, and the bond holder corrects him by saying that, actually, he owns the company. The investor is puzzled and says that he controls the majority of the stock, so the company is his, right? And the bond trader says "Yes, but let's see how much is left after I call on the company's debts."
There are other lessons to be learned from the investing food chain. One is the power of debt in contrast to equity. Debt holds a higher position than equity, and bankers and bondholders are in debt positions. Preferred stocks, stocks, and mutual funds are in equity positions.The takeaway here is that most amateur investors try to get out of debt positions and into equity positions, where they invest with their own money or assets. Professional investors would rather be in a debt position -- investing with a banker's money, for instance -- simply because debt is less risky than equity.
Yes, I butchered the story (my copy of that book is an ocean away right now). But the point is clear, people who own debts are first in line to get paid. If a company like Enron goes down, the debtors are paid first and the stock holders get whatever, if anything, is left. So I have to agree with him in that first statement.
But then Robert tries to use that statement to leapfrog into a claim that amateur investors invest their own money and that the pros borrow money to invest. Do you see the problem here?
At first Robert is using the term "debt position" to refer to the person who owns debt. In the very next paragraph he neatly swaps the term "debt position" to mean someone who borrows a lot of money. He's talking out of both sides of his mouth at the same time.
If you extrapolate from his first definition of "debt position" you would reach the logical conclusion that to minimize risk you should buy debt vehicles such as bonds, treasury bills and municipals. That is actually sound investment advice, and people who can't weather the volatility of stocks often are advised to buy bond funds.
But he goes the opposite direction in the second paragraph and tells you to borrow money to invest, or in other words, invest on margin. How is that safe? If I invest the bank's money and I lose it all, how have I protected anything? You think the bank is going to say "Well, it was our money you invested... I guess I'll just let this go"?
My goldfish can give you better business advice than this.
AND I DON'T EVEN HAVE A GOLDFISH!!!!
Leverage is to finance as a baby is to a marriage. A baby won't make your marriage any better or any worse, it'll just multiply the conditions that already exist. A child born into a good marriage will strengthen the bond, but a child born into a rocky marriage will simply deepen the divide. Money is the same way. Investing borrowed money into a good decision will multiply your returns, but investing borrowed cash into a money-pit is the quickest route to financial ruin.
In addition he goes on about "recourse debt" and "non-recourse debt". He does a good job of explaining the difference between the two (mortgages, in case you were curious, are non-recourse). But then he lets on smugly that he only takes on non-recourse debt, as if it were some big secret that he's letting you in on. What he doesn't tell you is (if he's telling the truth, and not joking again) that he pays for that privilege. Banks are relatively smart, and they know the difference between the two types of debt as well. So if you want a non-recourse loan, which increases the risk that they might lose money, your interest rate goes up accordingly.
What kills me are the legions of adoring fans out there taking his advice at face value. The man literally wrote an argument that contradicted itself in front of a national audience and his comments are filled with phrases like:
- This advice is PRICELESS!With get-rich-quick minds like these, it's not hard to figure out why the rich keep getting richer. It's people like this who are driving me to become a Democrat. I honestly doubt their ability to take care of themselves. It because of these people that laws, such as those surrounding "accredited investors", exist. If you are unfamiliar with that term, I'll go into it in more depth on Tuesday (yes, I'm baiting you. But if you are really curious just Google the term).
- That's my idol, a controversial expert! I really learn a lot from you Kiyosaki, you are a real genius. God I hope I will have a mentor like you.
- I love Robert Kiyosaki! He changed my life...I read One book of his, and now I own 3 houses a year later...this year I will buy 3 more.....oh and I quit my stupid job....so leave him alone!!!!!!!!!!
- Robert, some people may never get it, but a few of us would, thank you!
In the mean time, let me leave you with my favorite comment:
I LOVE SEEING ALL THE [people who rated Kiyosaki's article poorly]...IT JUST PROVES HOW MANY IGNORANT PEOPLE ARE OUT THERE, AND HOW THEY HAVE ABSOLUTELY NOTHING AND COMPLAIN ABOUT EVERYTHING, AND IT SUITS THEM RIGHT....YOU [people who disagree with Kiyosaki] WILL NEVER GET IT, OR EVER HAVE IT AND WILL BE BAGGING MY GROCERIES FOR YEARS!! ROBERTS COMMENTS, LESSONS, AND INFORMATION IS PRICELESS AND IT WORKS. THANKS ROBERT FOR YOUR ONGOING INFORMATION.