8 controls

Control #1 : Control over yourself

All That Glitters Is Not Gold
Rich dad then said something I recalled years later, as I rode down from the
mine way on top of the Peruvian Andes. Sitting in the bumpy four-wheeldrive vehicle, I could hear rich dad saying, “All that glitters is not gold. Fools
are fooled by the glitter. That is why it is called fool’s gold. Alchemists can
find gold in the darkness.”

When I hear someone say, “I buy only blue chip stocks,” I know this
person buys stocks of companies that glitter. Or if I hear “My broker is soand-so” and this person is mentioning this name-brand brokerage firm as a
form of name dropping, I know this person has bought the glitter. I become a little suspicious of mutual fund companies or stock brokerage
firms that advertise a lot. Those ads are expensive, costing millions of dollars. Someone has to pay for those ads and that someone is obviously the
investor. As mentioned earlier Warren Buffett’s mutual fund, Berkshire
Hathaway, doesn’t advertise for investors, and discourages people from investing in the fund. The point is, I do not see Berkshire Hathaway advertise

ments but I do hear ordinary people talking about Berkshire Hathaway a
lot. Maybe I hear about Berkshire Hathaway because Berkshire Hathaway
is run by an investor, rather than a large corporation.
Many professional investors look only in the darkness. They do not follow
Microsoft. Instead they are looking for the next Microsoft. They are looking
for the small start-up company that will grow into an international giant. They
are not looking for a name-brand CEO with the silver hair, the Ivy League degree, and the movie star smile. Many are looking for an entrepreneur, laboring away in a basement or garage, working on the next product that will solve
the next big problem facing humanity.
When playing Monopoly my rich dad would remind me that many people
also look for the glitter in real estate and want Boardwalk and Park Place, but
the true wealth is from owning the other properties and loading them up
with houses and hotels. It’s not the glitter that counts, it’s the cash flow. In
fact, in a recent Harvard Business Review article by Phil Orbanes, titled “Everything I Know About Business I Learned from Monopoly” (March 2002), he
references The Monopoly Companion: The Player’s Guide when he quotes
“Casual players don’t know this, but the 28 properties around the Monopoly
board are not equally valuable in terms of ROI. Boardwalk and Park Place,
which many regard as the most precious, actually are not. It turns out that the
oranges and reds have the hightest ROI and are the best properties to own.”
When I look for real estate investments, I generally do not go to the new
home subdivisions where there are flags, helium balloons, large eye-catching
signs, flashy model homes, and a sales trailer on site offering easy financing
plans. I know these marketing ploys are to attract potential homeowners who
are seeking emotional satisfaction. When I look for real estate, I am often looking at unattractive buildings, many with major problems, and generally in older
neighborhoods. Often that is where the highest yielding investments are . . .
but not always. I have bought brand-new real estate in hot new areas that has
turned out to be a financial home run. I do know that sometimes things that
do glitter are gold. Again it is financial education, being able to read financial
statements, the deal, the trends, the needs of the buyer and seller, that can
turn glittery fool’s gold into glittery real gold. That is financial alchemy

A Book on Accounting
In January of 2002, I was asked to give a talk to a small group of very prominent business people in Phoenix, Arizona. After my talk, a senior vice president of a large regional bank asked, “I understand your book Rich Dad Poor
Dad has sold more than 11 million copies, in over thirty-five languages,
worldwide. Is that true?”
Nodding, I said, “Yes, and the numbers sold keep increasing. Rich Dad
Poor Dad has been on best-seller lists for years, lists such as those of the
New York Times and the Wall Street Journal. Have you read the book?”
“No I haven’t,” he replied pleasantly. “Tell me what the book is about.”
“It’s a book on accounting,” I said with a smile.
“What?” stammered the banker. “How can a book on accounting be a
worldwide best-seller? That makes no sense. I have an accounting degree
and accounting could never be the subject of a best-seller.”
I spent the next few minutes telling him the story of my poor dad and my
rich dad. I explained how my poor dad was an advocate of word literacyand
my rich dad was an advocate of financial literacy. After explaining the story
behind the book, I then asked the banker, “How many of your customers are
financially illiterate?”
The banker shook his head, smiled and said, “Some of my clients are
very financially literate. Many of the richest clients are well versed financially.
But most of my clients have no idea what a financial statement is, much less
anything about accounting. Many of them make a lot of money but they have
no idea what to do with their money. It’s good for me since most of them
keep their money in savings. So yes, you are correct. Most of the people I
meet are not financially literate.”
Those of you who have read Rich Dad Poor Dad know how important
the basics of accounting . . . the income statement and balance sheet . . .
were to my rich dad. Rich dad often said, “Without both the income statement and a balance sheet, you really cannot tell the difference between an
asset and a liability.” In Rich Dad Poor Dad, the part of the book that caused
such a roar of protest was the idea that your home was not an asset. In most
cases, a person’s home is a liability. Some people put the book down after
that point and refuse to read further. My rich dad never said not to buy a
home . . . in fact he encouraged home ownership. His main point was that

we need to know the difference between an asset and a liability. Rich dad’s
point was that many people struggled financially simply because they purchased liabilities they thought were assets.
“So how can a book on accounting be so popular?” asked the banker.
Smiling, I said, “Well, it’s more than a book on accounting. It’s also a
book on personal accountability.”
“Personal accountability?” replied the banker. “Why personal accountability?”
“First of all, understanding accounting gives me control over my finances
and my future. I can run my own businesses and I don’t need someone else
to do my investing for me,” I said. “Secondly, personal accountability means
I do not let people lie to me.”
“Lie to you?” said the banker. “What do you mean by lie?”
“Well look at this Enron case.”
“Oh,” smiled the banker. “I understand.”

How Do You Tell Gold from Fool’s Gold?
Warren Buffett, America’s richest investor, believes that understanding accounting is a form of self-defense. On this subject he said:
“When managers want to get across the facts of a business to you, it can be
done within the rules of accounting. Unfortunately, when they want to play
games, at least in some industries, it can also be done within the rules of
accounting. If you can’t recognize the differences, you shouldn’t be in the
equity-picking business.”

When the Enron affair broke, one of the questions asked was, “What is proforma accounting?” which was one of the methods of accounting Enron was
using when the roof caved in. Rich dad would say, “Proforma accounting is an
accounting report that should begin with the words, “Once upon a time . . .”
Or, “In a perfect world . . .” Or, “If everything goes as planned . . .”

When Warren Buffett says, “If you can’t recognize the differences, you
shouldn’t be in the equity-picking business,” he means if you are not financially literate, you shouldn’t be picking stocks. Rich dad would say, “Picking
stocks without first knowing how to read a company’s financial statements is
gambling. . . not stock picking.” In rich dad’s mind, ERISA forced millions of
people to become gamblers . . . not investors . . . gambling with their future
financial security. Instead of filling their retirement arks up with gold, they
spent a lifetime being fooled and filled their arks with fool’s gold. So the
problem of a worldwide lack of financial literacy is a problem far beyond just
the ENRON and the Arthur Andersen scandal.
Rich Dad Poor Dad is a book about accounting, but it is also a book
about accountability. As accounting questions continue to surface with companies such as with Enron, WorldCom, and Xerox, it is obvious that the basics of financial accountability, not just accounting, are being overlooked.
Enron used “off balance sheet” accounting to account for liabilities. In
other words, its financial statement did not correctly show all liabilities.

Facts Versus Opinion
Many people think that accounting is dealing with facts . . . and that is true. Yet . . . for the most part, accounting is based uponot facts. I promised those who have read my other books or audio products that I would go deeper into what rich dad tauwhere we go deeper. The point that accounting is made up rather than facts . . . is a very, very important point to grasp

In February 2002, General Motors happily announced to the world that
they would be posting a profit. Given the tough economic environment of
2001, that news was worth celebrating. Yet critics began to talk about GM’s
underfunded liability, their pension plan. As I watched a discussion on television, one commentator was calling the billions of dollars in General Motors’ pension plan an asset. The second commentator was calling the same
billions of dollars a major liability. Again, they were talking about the same
billions of dollars, yet one expert called it an asset and the other called it a liability. The point here is that accounting is more often a matter of opinion
rather than fact.

Assets Are Liabilities
Another vitally important lesson rich dad taught his son and me was that all
assets could become liabilities. He said, “All assets have the potential to turn
into liabilities in the blink of an eye. That is why you must be careful when
you buy an asset and be even more careful after you buy it.”

It’s Time Now to Prepare for the Storm
This book is being written in spring 2002. Given the needs of the massive
baby-boom generation, the generation generally defined by those born in
America between 1946 and 1964, a mass of approximately 75 million people,
83 million when immigrants are measured, there should be another stock
market boom . . . a big one, when they are ready to start retiring.
Many of these baby boomers will be forced once again to enter the stock
market through their DC pension plans. This last-chance gasp for some degree of financial security will cause the big boom before the big bust. This
means that we all have till approximately 2012 to load our arks with good assets rather than bad assets . . . assets that will break loose in the storm and
turn into liabilities. Two thousand twelve is only ten years from now! Of
course, the big crash could happen tonight or tomorrow night. If nothing
happens, the big bust may take till 2016 . . . but the big bust will come. It will
come simply because there are too many millions of baby boomers and their
parents who are not in control of their arks, or don’t have the financial education to be in control of their arks during rough seas.
This book is not so much about predictingthe exact date as much as it is
about preparing . . . and the good news is that we all have time to prepare. I
point out action steps to assist in your preparation for the coming perfect
storm, a storm that will probably cause a giant boom and a giant bust. Remember rich dad’s words, “If you want to become rich, start out investing a
lot of time before you begin investing a lot of money.”

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