John T. Reed's analysis of Robert T. Kiyosaki's book Rich Dad, Poor Dad Part 3

Robert Blake

In this, Kiyosaki also reminds me of Robert Blake, the movie and TV actor best known for starring in the late-70’s TV series Baretta. Blake’s TV-talk-show appearances were invariably interrupted by audience applause. Why? Like Kiyosaki, he was given to spouting platitudes so grandly and self-confidently that the audience assumed he must have had said something great.

He didn’t.

[Oddly, long after I posted this comment about Kiyosaki reminding me of Blake, Blake emerged from obscurity when his wife was shot to death as he returned to a restaurant to get the gun that he forgot there. My comparing Kiyosaki to Blake had nothing to do with guns and murdered wives. Also, a Los Angeles Times article about Blake’s murdered wife, Bonny Lee Bakely, said she told friends that she wanted to marry a celebrity like Blake “to show up kids who made fun of her in school.” That is reminiscent of my analysis of Kiyosaki’s lifelong pursuit of money and status as an overreaction to insults he received in elementary school.]

Redefining words

Politicians also give new, bogus meanings to established words and phrases in order to mislead people. For example, Democrats refer to almost all spending of taxpayer’s money on government programs as “investments.” They call abortion “choice” and Republicans call opposition to abortion being “pro-life.” Kiyosaki does this, too. For example, he says, his book will “challenge the belief that your house is an asset” and “Define once and for all an asset and a liability.” His quibble with the notion that your house is an asset is the mortgage and other carrying costs and lack of rent income.

Trust me, your house is an asset. The mortgage on your house is a liability. As they accrue, carrying costs of your house like taxes and insurance are also liabilities. Once again, Kiyosaki may hurt some people with this sort of rhetoric if he discourages people from owning a home. Maybe what he is trying to say in his muddled way is that it is wise to live beneath your means, that is, buy a smaller home than you can afford, so that you have a smaller carrying costs and therefore have more money to invest. I agree. But you can learn that lesson in a non-muddled way from the book, The Millionaire Next Door.

Some have ordered me to be “fair and balanced” by attacking Republicans every time I attack Democrats. I am not trying to be Fox News. They, like politicians, are trying to please masses of people for ratings. I am stating my views honestly, not twisting them to make them fit into some equal-time formula.

I wrote an article listing the various intellectually-dishonest debate tactics at http://johntreed.com/blogs/john-t-reed-s-news-blog/60887299-intellectually-honest-and-intellectually-dishonest-debate-tactics.

Taking both sides

Another thing politicians do is take both sides of an issue. Kiyosaki is on both sides of many issues.

 Extravagance

Kiyosaki says his “poor dad” frequently said, “I can’t afford it,” while his “rich dad” said, “How can I afford it?” There’s another one of those Jesse Jacksonisms. I agree that a knee jerk “I can’t afford it” is a bad habit. I also agree that asking, “how can I afford it?” is a good habit. However, this little yin-and-yang platitude leaves off the question of whether the expenditure represents good value for the money? Kiyosaki buys extravagant things like a Mercedes and a Porsche and a Rolex watch and seems to regard the “How can I afford it?” question as the only appropriate response to any conspicuous-consumption impulse.

This puts him at odds with the behavior pattern depicted in the book The Millionaire Next Door. That book, which is based on a study of many real millionaires, found that actual millionaires generally buy used American cars. “How do you think a man like me got to be a man like me?”

Think about it. One of the keys to success in business is holding your costs down and getting good value for every dollar spent. How could the same person be in the habit of spending money on extravagant items for which a large show-off premium must be paid? (Note: The Millionaire Next Door book, although written by college professors, has been criticized by other college professors as illogical. For example, they found that real millionaires had taken more risks than the average person and concluded that risk-taking leads to millionaire status. That’s an error called “winner bias”—concluding that characteristics of winners caused them to be winners. Most likely a study of the bankrupt persons next door would find that they, too, took more-than-average risk. If so, the proper conclusion would be that risk-taking leads to extraordinary results, which can be positive or negative. I do not recommend the Millionaire Mind book written by one of the Millionaire Next Door authors, although it makes a few good points.)

Conspicuous consumption is for pretend millionaires

The authors of The Millionaire Next Door found conspicuous consumption was typically a sign of a non-millionaire who was trying to impersonate a millionaire. Ostentation is item number one in my real estate B.S. artist detection check list. The fact that Kiyosaki goes out of his way to talk about his Porsche; his wife’s Mercedes; travel to Peru, Norway, Malaysia, and the Philippines; his “expensive attorneys, accountants, real estate brokers and stockbrokers,” and his $400 titanium driver, makes me wonder whether he is really a financial success or a walking (driving?) Potemkin Village.

Kiyosaki likes Texans. They have a saying: “All hat and no cattle.” Kiyosaki has a big “hat” (showy displays of wealth) and he talks about it a lot.

The millionaire real-estate investors I know generally try to do their own legal and accounting work. They often buy through agents, but try to sell without agents. Kiyosaki is the first real-estate investor I ever heard of who was eager to employ expensive accountants, attorneys, and to use brokers always.

One woman who responded to my “OK, What’s the point?” question said Kiyosaki’s point was that you should not waste money on expensive toys. I wrote back, “Huh?! The guy who brags about his Porsche, Rolex watch, and $400 titanium golf club taught you not to buy expensive toys?!!!” She admitted that I had a point.

I also have an article on how wealthy people really ought to spend their money.

Risk management

Kiyosaki’s advice on risk taking borders on thrill seeking. He approvingly quotes a Texas saying, “If you’re going to go broke, go broke big.” This is dangerous, adolescent-level advice and may be why he has a bankruptcy (or not depending upon whom you believe) on his resume.

Taking calculated risks is a prerequisite for a successful life. Thrill seeking is taking risks for their own sake without calculating. On page 13, he says, “Learn to manage risk,” but the book gives no indication of how to do that. Nor does it give any indication that Kiyosaki knows how to manage risk or ever cared about the subject. Indeed, risk management is a rather sophisticated skill that would not be the forte of an eighth-grade dropout like “rich dad.” I recommend the following books which discuss risk management. Kiyosaki’s head would explode if he tried to understand them.

Against the Gods, Capital Ideas, and Capital Ideas Evolving by Peter Bernstein
The Little Book of Common Sense Investing by John Bogle
Winning the Loser’s Game by Charles D. Ellis
The Four Pillars of Investing by William J. Bernstein
Fooled by Randomness by Nicholas Taleb

I also discuss risk management in my books Succeeding and Best Practices for the Intelligent Real Estate Investor.

Kiyosaki says he buys stock in small-cap companies that are just about to go public in Rich Dad Poor Dad. That’s rather unlikely. How do you buy stock in a company before it goes public? In theory, you could buy stock in closely-held corporations from the founder or his family or associates, but just before they go public seems like an extremely unlikely time for the owners of closely-held stock to be selling. He refuses to name any such stock that he bought.

Ethics

His recommendations on using inside information in securities trading and deducting vacations in Hawaii are not likely to get him appointed professor of ethics.

My How to Buy Real Estate for at Least 20% Below Market Value series has an ethics chapter then a smaller section on ethics in many chapters. 

Factual errors

This book has many important factual errors.

Error	Correct version
One of the main reasons net worth is not accurate is simply because the moment you begin selling your assets, you are taxed for any gains. (page 80)	About the only asset you would sell at a gain would be real estate. All other assets like personal cars, golf clubs, furniture would sell at a loss for tax purposes. You don’t have to pay tax on up to $500,000 of gain (married couple filing jointly) on your residence because of Section 121 of the Internal Revenue Code. You would have to pay tax on the sale of a rental property, but that’s why most investors do Section 1031 tax-free exchanges. I have two books about tax-free exchanges: Aggressive Tax Avoidance for Real Estate Investors and How to Do a Delayed Exchange. Kiyosaki himself mentions tax-free exchanges two pages later.
the income-tax rate of the corporation was less than the individual income-tax rates An individual with the knowledge of the tax advantages and protection provided by a corporation can get rich so much faster than someone who is an employee or a small-business sole proprietor.	Sole proprietors are only taxed once. Corporation owners are taxed twice on corporate profits: once at the corporate level and again on dividends that leave the corporation to its stockholders. Even if the corporate tax rate were just 1% you would be worse off because it is added to your individual rate, not instead of it as Kiyosaki implies. It’s true that you can receive a reasonable salary from the corporation and that will only be taxed once, but Kiyosaki disdains mere salaries as highly-taxed “earned” income. The only tax benefits of a corporation are the following: A corporation can deduct various forms of employee insurance. Sole proprietors can also deduct their health insurance premiums. Corporations can also create “cafeteria plans” to deduct limited amounts of child care and some medical expenses that are not normally covered by insurance. In a one-man or mom-and-pop operation, these small savings would probably not give you a net benefit after paying the extra setup and annual costs of incorporation. See my article on how to take title to assets.
my [corporation] bought me my first Porsche	He implies that you can deduct a Porsche if you simply have your corporation buy it instead of buying it as an individual. In fact, only “ordinary and necessary” (IRC§162) expenses are deductible and whether a corporation is involved is irrelevant. Furthermore, the tax law contains explicit limits that prevent full deductions for new luxury cars. He says all his Porsches are used. This one could have cost $100.
A corporation can do so many things that an individual cannot. Like pay for expenses before it pays taxes.	Both corporations and sole proprietors pay expenses before they pay taxes. Sole proprietors pay taxes only on the net income of their businesses, which means after expenses.
“by owning your own corporation—vacations are board meetings in Hawaii. Car payments, insurance, repairs are company expenses. Health club membership is a company expense. Most restaurant meals are partial expenses.”	There is no difference between the ability of a corporation to deduct these expenses compared to a sole proprietor's ability to deduct them. Furthermore, it would often be fraud to deduct these items. For example, a trip to Hawaii is only deductible if the principal purpose of the trip were business and it was “ordinary and necessary.” IRS would look carefully at a business trip to a popular vacation destination like Hawaii. Even if the trip were predominantly for business, only the airfare and meals and hotels during the business days of the trip would be deductible. Hotel and meal expenses for the purely vacation days would not be deductible. Business-related car expenses are deductible for both corporations and sole proprietors. Health-club memberships are never deductible for either corporations or sole proprietors. In order for a meal to be deductible or partially deductible, you must be away from home overnight on business or you must entertain a client or customer at the meal and you must discuss business or negotiate immediately before, during, or immediately after the meal. Since entertaining forces you to buy somebody else a meal, and you can only deduct half the cost, at best, you are no better off than if you had eaten a totally nondeductible meal alone in the restaurant.
“I earn 16% from the state government.”	No, he doesn’t. He is referring to tax lien certificates which can pay interest rates that high. They are secured by real estate, but payments are not guaranteed by any government entity.
There are forms of insider trading that are legal	It is generally illegal to buy or sell stock when you are in possession of material, non-public information about the corporation in question. The only legal insider trading is non-short-sale trading which is done by an insider who is registered with the SEC, reports his trades within ten days after the end of the month in which the trades occurred, and who did not have material, non-public information at the time of the trades.
Says friend did a tax-free exchange from a sole-proprietorship rental house to a mini-storage limited partnership. (Page 176)	That is explicitly prohibited by Internal Revenue Code Section 1031(a)(2)(B,C,D). Errors like this cause me to marvel at the fact that Kiyosaki's co-author is a CPA. In 2008, she was suing Kiyosaki for some reason.

Kiyosaki, like many other successful politicians, has been able to get people to stay loyal to him even after they find out he has lied to them. I find this fascinating and have created a page where various Kiyosaki dupes explain why they still love him even though he has given them false information.

“People do not believe lies because they have to, but because they want to.” Malcolm Muggeridge

The Rolex watch

A reader tells me that Kiyosaki’s corporation course says that he bought a $4,000 Rolex watch through his own corporation. He had them deduct it as a bonus to him for his sales that year.

1. Rolex watches are not a good value. They are an extravagance whose main purpose is to enable their owner to show off.
2. A bonus from your employer, whether in the form of cash or goods or services, is taxable income at the federal level, at the state level in most states, and at the municipal level in some areas. If Kiyosaki received a $4,000 Rolex watch from his corporation, he would have to pay tax on that $4,000 of income on his next quarterly income tax return. In other words, from an income-tax standpoint, purchasing the watch through the corporation is a completely meaningless exercise. Whether Kiyosaki buys the watch from his own funds or receives it from his corporation, he is out $4,000 (either as owner of a corporation that now has $4,000 less in its bank account or as an individual who now has $4,000 less in his bank account) and he gets no personal tax deduction whatsoever from it. While it is a deduction for his corporation, so is just paying him $4,000 in cash, and it is also ordinary income to him individually, so it’s a complete wash.
3. I surmise that Kiyosaki is implying this is a clever way to get a Rolex watch for free or at a discount by making it deductible. It is neither. If Kiyosaki does not know what I have just said about this transaction, he is too ignorant of this subject to be writing and lecturing about it. If he does know, then he has a rather low opinion of the intelligence of his readers and an equally low regard for their best interests.

Not likely

Kiyosaki’s book also contains many stories which I cannot say for sure are not true, but I can say I am familiar with the subject matter he is describing and his scenario is highly unlikely. Even if he actually did these things, it is inappropriate for him to present them without a warning that they are quite atypical.

 Trading on inside information

Kiyosaki says,

The reason you want to have rich friends who are close to the inside is because that is where the money is made. It’s made on information. ...the sooner you know, the better your chances are for profits with minimal risk. That is what friends are for. (page 154)

It is against the law to provide material, non-public information about a publicly-traded company to a person who trades in the stock of that company based on that information without first disclosing to the public what that information is. It also against the law to buy or sell stock based on such information without first disclosing that information to the public. To make the disclosure, you have to fie a particular form with the SEC.

• Securities Exchange Act of 1934 [The civil penalties (triple damages) are at 15 USC §78t-1 and 15 USC 78u-1.]
• Insider Trading Sanctions Act of 1984 ( Pub. L. No. 98-376, 98 Stat. 1264)
• Insider Trading and Securities Fraud Enforcement Act of 1988
• Securities and Exchange Commission Rules 10(b)-5 and 14(e)-3
• Cady Roberts Co., 40 SEC 907

Persons who provide inside information are called “tippers.” Person who receive such information are called “tippees.” Both are breaking the law if the “tippee” profits from such information. Here is the Black’s Law Dictionary definition of a “tippee.”

Legal definition of a ‘tippee’

“Persons given information by insiders in breach of trust. The purpose of [SEC] Rule 10b-5 is to prevent corporate insiders and their ‘tippees’ from taking unfair advantage of the uninformed outsiders. Conspiracy between corporate insiders and person to whom insiders have furnished information is not required for such person to be declared a ‘tippee’... ”

Registration and reporting requirements if you receive inside information

Persons who are not corporate executives of the company in question and who possess inside information about that corporation are required to file a personal statement with the SEC. If they buy or sell the stock of the corporation, they must report those sales within ten days of the end of the month in which they occur. They are generally barred from any short selling. If a person trading based on material, non-public information makes a profit within six months of trading the stock, the corporation and contemporaneous traders can legally recover that profit.

Bounty for reporting inside traders

If you report an apparent illegal inside trader to the SEC, you are eligible to collect a bounty of up to 10% of the amount of improper profits he is forced to give back. 17 CFR §§201.61 to 201.68

As stated above, Kiyosaki says in his book, “Frequently, my broker will call me and tell me [to buy] a company that he feels is just about to make a move that will add value to the stock, like announce a new product.” Perhaps Mr. Kiyosaki would like to prove this has really happened to him by providing the name of the broker, the date, and the stock in question for just one of these “frequent” occurrences. As far as I know, he has not responded to this invitation.

Simply stated, it is generally illegal to buy or sell a stock based on material, non-public information. In 2002, long after I first posted the above discussion, Martha Stewart was being investigated for precisely the behavior that Kiyosaki advocates in his book and says he has engaged in: trading stocks based on inside information.

More research on this page than in his book

One visitor to this Web site commented that she thought I did more homework analyzing Kiyosaki’s book than he did writing it. I suspect that’s true, but then it’s not saying much.

Property manager is the key to real estate?

Kiyosaki says, “A great property manager is key to success in real estate.” He’s nuts. Experienced property owners do not hire independent 5%-of-the-gross property-management companies. When syndication was big, those companies owned income properties all over the U.S. They tried to use local companies for everything they needed, but they found they could not get good service out of local property-management companies so they all started their own in-house property-management companies.

I heard the head of a major pension fund say at a speech that his company tried to hire local property managers for office buildings and finally concluded they had to create their own in-house property-management company. All my millionaire friends manage their properties themselves and would never use an outside property-management company. The property-management industry has almost no happy private clients. They mainly work for owners who are not spending their own money like government agencies, nonprofit entities, corporations, and bank trust departments.

The problem with property-management companies is that they neglect properties and use expensive suppliers and subcontractors. I estimate that approximately 90% to 95% of property managers take kickbacks from those expensive suppliers. When I was a property manager I reported a number of bribe attempts to my boss. Both my predecessor and my successor at the job took kickbacks. (A subcontractor showed me a canceled check cashed by my predecessor and my successor was fired for taking kickbacks.) My secretary had worked for a major property-management company before working for me. She said every property manager in her old company took kickbacks.

If you ask the typical successful investor if he ever used a property manager, he will shudder at the memory, admit that he did once, and somberly swear, “Never again.” See my book on How to Manage Residential Property for Maximum Cash Flow and Resale Value to learn how to manage your property yourself, which is the only way to go. 

Click here to go to Part 4