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?