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Where is "Rich Dad, Poor Dad" Now?

September 10, 2007

The book that swept the nation the last five years is no longer the leading seller at the top of the advice book list. And it is not hard to see why. I believe it has done more damage to our economy than any book in the last twenty years.

The basic premise of the book is that rich dads teach their children that real wealth is accrued by using other people’s money to accumulate properties and wealth. The assumption is that you can borrow against the equity position in hard assets (i.e. homes and property) and because these assets don’t depreciate in value – in the long term – you will be able to use other people’s money to make a fortune. Just use the equity of your own home, leverage it to buy nine other homes and you will be set for life.

This is, indeed what rich dads teach their kids. And because property values over the long-term go up, this concept does work.

But the problem with leveraging is that it only works for one group of people: Those who already have enough assets in reserve to make it work in the long-run. When the inevitable downturns in the market happen, most people with short positions on their investments (meaning that they have to continue making money or their loans will be called in) go broke or worse.

This is actually what is causing the housing crisis to worsen; not just the family that spent too much on a house financed with an Adjustable Rate mortgage. The prices would never have gone up so quickly if people all around the country had not been so eager to leverage everything.

What rich dads also teach their kids is this: When you run into a slowing housing market, hold onto assets and dad will help you pay for the lending costs. Poor dads, on the other hand, cannot help their kids when the short-term profits end. Therefore, poor kids panic.

See the difference?

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7 comments

  1. Any book that only tells part of the story and not the “rest of the story” should be sued by everyone who read it and lost everything. If a person came to your house and presented the information in the book to you, they would be held responsible. Why shouldn’t the authors of a book have to abide by the same rules?


  2. I’ve known a couple of wealthy individuals who indeed made it a standard business practice to use other people’s money to finance their projects. They would find investors willing to invest in the project (investors who knew it was not federally insured), usually by committing to a return on investment greater than that of a traditional mechanism, such as a savings account or CD. Even though the wealthy person is using other people’s money you have to remember that the wealthy person is signing his or her name on the project contracts. The wealthy person has to throw in a good portion of his or her own revenue or the bank gets a bit nervous about the person’s commitment. The wealthy person is assuming a great deal of risk; hence, the wealthy person gets a bigger piece of the pie if the project is successful.

    Don’t make the mistake of thinking I’m an advocate for the wealthy, I am not. It’s just that the tone of this posting struck a nerve with me because my father once said the system is designed to keep middle class or poor people down. I believed that lie for most of my life; I refuse to believe it any longer. I believe America is still a place of opportunity as long as people use their heads, make smart investments, have long-term patience (I mean years worth of patience, not months), and be willing to take some calculated risks.

    As for the current housing mess, it is about the greed of multiple players from all economic levels. The greed of the builders was demonstrated in their almost hourly increases in the homes they we’re building. Buyers got greedy because they saw a chance for quick equity so they over-extended themselves just to get into a house. The lenders got greedy by lending to high-risk people…a practice that was unheard of a couple of decades ago. Real estate agents got greedy because of the numbers of people who abandoned other careers to become real estate agents in order to get in on the action. And don’t get me started on those house-flipping shows that led many Americans to believe that bags of cash could be made almost overnight by anyone with a toolbox and a pretty wife or girlfriend to sell the homes.

    One thing I have come to understand: those who say you’ll never get rich working for someone else are right, with only a few exceptions for highly skilled vocations. The thing about working for yourself is the risk factor. Are you willing to step out in faith and start your own business, or do you prefer the safety of a regular paycheck? Most people who get wealthy are not necessarily the smartest or the most talented at what they do; they are, however, willing to stick their neck out and stick with it.


  3. Anon #2: I agree with you on many counts. First, the greed of the housing crisis can be laid at many people’s feet. Second, the thing that holds many lower to middle class families down is the idea that only the wealthy can make money. Third,that you can leverage wealth with other people’s money is possible and can be done.

    But it is this book I disagree with. It doesn’t get realistic with the readers. It promises only part of the picture. The best thing for anyone to do is to allow their assets to grow gradually…and diversify. All of the assets in one investment category (like real estate) is a recipe for disaster.

    Thanks for your comment.


  4. I wonder, if we have a less than average rainfall this winter would the subsequent drought make the housing and economic situation worse in California. Duh! After all, the state hasn’t done anything to accommodate for the water needs of all these new homes and new residents. We hear a lot about building and repairing roads and bridges, but what about water? Pray for rain brothers and sisters…pray for rain!


  5. But with Natomas now being in a 70-year flood plain instead of the announced “200-year flood” status, we should pray for the right amount of rain.


  6. As the Cos once said, “Noah, how long can you tread water?”


  7. People lose interest with this many days between postings. I have liked this blog but I think I’ll be looking around for some others.



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