Step3 Prophet

Thoughts on Rich Dad's Conspiracy of the Rich - Part 2

Kiyosaki starts the book by delving into some of the relationships between business, government, and the Federal Reserve, as well as looking at a time line for the financial crisis of 2007/2008. Delving is maybe too strong a word, since he really don't go any deeper than stating or implying there is relationship, and since you (the reader) are not rich, you are excluded.  Chapter 1 is rhetorically titled "Can Obama Save the world?" and the obvious answer is no. I respect Kiyosaki for giving the message that you have to save yourself. He states that "Personally, I don't expect government or big business to save me. I simply watch what the powers that be actually do, and respond accordingly."  According to Kiyosaki the key to saving ourselves lies in financial education, specifically on the topics of Taxes, Debt, Inflation, and Retirement. 

  Chapter two talks about the conspiracy in education. Kiyosaki spends a lot of time on the difference between two schools he attended in Hawaii growing up, one predominately rich and one predominately poor, then he goes on to say (in a round about way) that neither teaches a true financial education. He's spends a lot of time promoting an "us vs them" mentatliy in just the first two chapters, so I was kind of caught off gaurd by that.

 Kiyosaki introduces his first "new" rule of money in chapter two as well, namely that "Money is knowledge." He uses a stock trade as an example of how knowledge can be turned into money rather easily. I hope the fact that you can leverage your knowledge of things to make a profit is not news to people, and has been around for as long as there have been trade and merchants. The kind of knowledge you need is much deeper than a firm speculation about the direction of stock. I realize that these first five chapters are more setup than actual information, but I hope to see some better example of how "money being made of out nothing - nothing but knowledge. " The statement itself is a little simplistic, usually you need some sort of cash or credit or property to make a transaction happen, even if you are using leverage.

 There are a lot of unesssary diagrams and lists in the book. So far none of them have been useful. The text digram showing the relationship between the old school he attended and the new school was particularlly un-enlightening since neither made a difference in his money education.

Thoughts on Rich Dad's Conspiracy of the Rich - Part 1

  A friend of mine lent me the book Rich Dad's Conspiracy of the Rich by Robert Kiyosaki. Kiyosaki is a very polarizing figure in the world of personal finance and wealth building, and I've read one of his other books before, so I thought this would be an interesting read. As a side note, I think Kiyosaki is crazy like a fox. His advice is very good, but at the same time carries a lot of risk that he doesn't adequately account for in the book that I first read.

 He starts the book by lamenting about the poor state of financial education in public schools and lists a bunch of basic finance terms that people may not fully understand, so I thought I would go over them for starters. These questions and terms are taken from page 6.

 The difference between a stock and a bond: Stocks represent an ownership stake in a company. Bonds represent debt obligations of a company or city. A bond is promise to pay back money that has been borrowed by the company/city, whereas a stock promises nothing unless you acquire enough stock to get control of the company.

 Why are preferred stocks labeled preferred? Preferred stock(or shares) are like a cross between a stock and bond. Preferred stock typically pays a set dividend, generating income like a bond, but also can trade like a regular stock share.

Why are mutual funds labelled mutual? They are mutual because a group of people pools their money to buy more stocks at lower cost than an individual could on their own. To get a diverse mix of stocks requires a lot of money and substantial costs, which mutual funds spread among all investors to lessen the impact on the individual.

The difference between a mutual fund, a hedge fund, and exchange traded fund (ETF) and a fund of funds. A mutual fund is explained above. A hedge fund is similar to a mutual fund, but it is a private investment and can therefore take more risks(and thereby get greater returns). Because it is riskier, hedgefunds typically require investors to be very wealthy already so a significant loss will not be as bad for the investors. An exchange traded fund is a mutual fund that trades during the day like a regular stock. ETF's are usually cheaper to own than a similar mutual fund, but have more transaction cost.  A fund of funds is made up of many mutual funds to give the investor one place to meet all their diversification needs. The most common examples are "lifetime" funds or "Target retirement" funds that change their assets overtime as people get to a specific retirement date.

How debt can be both "good" and "bad". Bad debt is debt that brings no return on your investment. All your unpaid credit card balances typically fall into this category, as well as car loans and personal loans. When you go to sell or trade in your car, it will be worth far less than what you paid for it if you bought it new. Good debt helps you increase you finacial returns. Houses are the most common example, or buying stock on margin (a loan from your broker). You could also borrow to start a business. By borrowing money you can afford something you wouldn't have been able to buy on your own, and which could be sold for a profit( or produce income). In my experiance Kiyosaki tends to downplay the risks involved with "good" debt.

The difference between capital gains and cashflow. Capital gains are the differnce in price between what you paid for something and what you sell it for. For example, a stock day trader hopes to make money by buying a stock a low price and selling at a higher price. Loosely speaking, cashflow is money that you earn from your investments or business. For example, if the stocks you own pay a dividends, you get a steady stream of income as long as you own them.

 

Review of The Little Book of Value Investing

I just finished reading the book mentioned in the title. As you probably guessed, it is all about value investing. See my post on common investment strategies for an explanation of that. The book was written by Christopher H. Browne, is paper back size, 180 pages long and was rented from my local library for free. I’m considering buying it though. The foreword of the book has a story by a different individual that I think pretty clearly illustrates my opinion that an objective valuation of a companies stock and the stocks actual price have little in common, but I’ll save that for another day.

 The basic principle the author espouses is, of course, value investing. As I’m coming to find out, every book in finance has facts and figures to support why it has the best strategy for increasing your net worth, and this book is no exception. Through out the book he touts success stories like Warren buffet and Benjamin Graham. My only disagreement with those stories is that if his strategy is so successful, there should be more names than the handful of people he talks about. That, combined with the fact that half the book is a pep talk about value investing indicate to me that there are other barriers to executing this strategy.

Chapter 1 talks about how value investing can be accomplished by any one of average inelligence and draws the analogy of buy stocks cheaply to buying steaks on sale.

Chapter 2 talks about the intrinsic value of a stock, usually bases on price to earning(P/E) multiples and how looking at that would have saved investors from most of the boom and bust cycle that markets go through.

Chapter 3 starts to lay the ground rules for value investing. He recommends buying stocks when they are less than 2/3^rds their intrinsic value. This provides a margin of safety and an edge over an index fund when the stock readjusts to market value. Avoid companies with excessive debt. Diversify your portfolio. He dosen’t give a hard number, just ask the question: “If one of my stocks went bankrupt, could I just slough it off?” And finally ignore what the general market trend is and stick to your investment strategy.

Chapter 4 is more in depth about P/E. He cites a study showing the Low P/E stocks outperformed higher P/E stocks over periods from 5-20 years. I don’t recall if he mentions it, but I would be leery of companies that have low P/E multiples due to a poor future outlook.

Chapters 5-16 go over other methods of uncovering value. Some I think would be useful others I don’t think I could realistically benefit from. He talks frequently about investing in foreign markets as well as in the US, but the examples his gives of finding value have largely to due to with uncovering hidden caveats of that countries tax code. He also recommends looking at insider and institutional buying. Insider selling is not very indicative of a company’s health since insiders usually have stock options, but buying can be a strong indicator of management’s faith in the company. Use online search stock screener to find companies that fit the value criteria, and then examine them more closely. Chapters 11-15 in particular lay out a list of things to look at when examining a company closely. The author recommends looking at 5 years worth of company balance sheets and comparing trends. He goes more in depth about what to look for on a company’s balance sheet than Cramer did [see my review of Cramer’s book], and again advises the if the balance sheet looks too complicated to truly understand, avoid the stock. Here he advises that the ratio of a company’s liquid assets to short term debt should be approximately 2-1 or less.

Chapters 17-21 are mostly pep talk chapters.

 

There are actually many similarities between Cramer’s advice and Browne’s, but Browne goes into more detail on every subject. Overall this book was fairly easy reading, but to truly benefit from it I’ll have to reread portions and have it by my side as I evaluate particular companies.

You Got Screwed!

I was traveling from Seattle to D.C. on business yesterday and to kill time I read James L. Cramer's book You Got Screwed! I'm not a fan of Cramer, mostly because I find his TV show “Mad Money” to be annoying. Despite his frenetic show about something which should be a cool and rational decision, I've heard that he is actually quite savvy about investing so I decided to read some of his works. I was not keen on spending any money however, so I used my recently acquired local library card to rent the book! Money well spent in my opinion.

The title pretty much gives you a feel for the book. It was published in late 2002 by Simon and Schuster, is 117 pages long, and 87 of those pages are all about blaming someone else for the crash of financial markets at the turn of the millennium. The Table of contents lays it all out for you: 1. What happened, 2. Worldcon, 3. Enron, 4. Rhythms Net, 5. All-Stocks-All-the-Time, 6. Executive options, 7. Mutual funds, 8. Brokerages, and 9. It's a Jungle Out There. Chapters 1-8 show the culpability of the corporations, the government, and the financial industry. Chapter 9 is Cramer's words of wisdom on stock investing. The book reads like a personal conversation between you and Cramer(he does most of the talking) and the points he brings up in distributing responsibility for the market decline are all valid. Companies willfully cooked the books in their favor to improve their stock, the stock analyst were in the pockets of investment bankers, and the SEC could do little about it. He does an excellent job of illustrating where conflicts of interest are in the financial industry. My only fault with his description of the causes is that he seems to hold the individual completely blameless!  On page 73 he writes “Did the government bother to explain the risks to anyone even as the government turned everyone into portfolio managers handling 401k's and IRAs? Did anyone know how risky this enterprise was? No one from the mutual fund industry wanted you to know how risky this was. They did everything they could to explain the reward and hide the risk.” I find it hard to believe that no one was told there was risk involved. Every mutual fund comes with a prospectus, everybody knows stories of the great depression. It's more likely that people figured that they would not have to face the consequences of a downturn in the market in spite of history. Recent historical trends figure more prominently in peoples minds, and that combined with greed made stocks seem like a less risky proposition.

My other issue is a lack of in depth explanation on some items.  He discusses WorldCom's method of hiding losses by acquisitions and mergers with other companies, and I wouldn't have understood it nearly as well if I hadn't read Burton Malkiel's “A Random Walk Down Wall Street”.  He presents few numbers and tables to illustrate or support his points. The two tables given in the book are company balance sheets, and by way of explanation states “it is not hard to distinguish a clean balance sheet, where the common stock is unthreatened, from a dirty one”. I don't have much experience with balance sheets, so I would have liked a little more details. Also, he comes out and states repeatedly that “buy and hold” is a not a good strategy. This sounds crazy to the long term mutual fund investor, until you realize that he is talking about individual stocks and not mutual funds. Later he states that index funds are a good investment(but not other types of funds) if you can't find time to research individual stocks.

So what does he recommend? The last 30 pages cover his advice for stock picking. It boils down to:
-Look for stocks with positive cash flow and simple balance sheets
-stocks that pay dividends
-stocks where company insiders are buying large amounts
-Stocks that have reasonable price to earnings multiples
-companies where the board of directors are not all insiders,

Avoid
-CEO's  that have an unreasonable compensation package
-Inexperienced or retiring CEO's
-companies with multiple classes of stock
-stocks that are controlled by a parent company
-buying and selling all your stock at once. Don't try to call the high/low

These are all very reasonable rules. He acknowledges that  you will lose out on the biggest gains if you follow these rules, but feels that the reduction of risk is worth it(and touts his own record of 24% annually as a hedge fund manager). He also advises a mix of bonds and stocks as you get older. His idea of diversification is 5-10 stocks, which is a little on the low side compared to risk evaluation studies(it should be more like 50-60). If you don't have time for stock research, he recommends diversified index funds or hedge funds if you can afford it. He likes hedge funds due to the greater transparency in operations, greater discretion in investment decisions, and the fact that compensation is tied to performance.

  Overall this book has some very useful advice. The intended audience has probably moved on and gotten over the decline by now, but the conflicts of interest he points out are still valid today and stock selection criteria useful to people trying to make sense of the stock market.   

Review of "Smart Couples Finish Rich"

I just finished reading David Bach's "Smart couples finish Rich." Overall, it looks and feels like many other general personal finance books.

Pro's
-He uses personal values to motivate financial goals and fiscal responsibility. I like it because it make finance more personal. Your mom can tell you to clean your room, but you aren't going to be motivated to do even if it is your best interest. Likewise, people can tell you you need to save for retirement because it's in your best interest, but linking it to a personal value will motivate you more.

-Compelling (if sometimes dated) graphs and tables to show examples of investment growth.

-Easy to use "worksheets" to help you follow through with his advice.

-All around solid investment advice.

-An interesting final chapter on how to get a raise from your work place in just 9 weeks. Too bad my salary is government mandated.

Con's
-Too many trademarks.  Value Circle^(TM) my ass.

-His grandma stories don't really do it for me

-It reads pretty much like an individual personal finance book, but with the occasional "You should check with/include your spouse on this" admonition.

-If you think you're going to get 12% out of the stock market over 40 years (pg 117, top), you're in for a surprise. To be fair, he uses muliple examples with varying rates, but this is the rate he quotes. Later on I think he quotes a lesser rate for historical market performance.

In summary, a good book for individuals and couples just starting to get  a grip on their financial life. It is also a good reminder for people who have read these types of books to make sure your insurance coverage and will is up to date.