The Qualified Investor | Fundamental Investing | Technical Investing

Rich dad defined the qualified investor as a person who has money as well as some knowledge about investing. A qualified investor is usually an accredited investor who has also invested in financial education. As it relates to the stock market, for example, he said qualified investors would include most professional stock traders. Through their education, they have learned and understand the difference between fundamental investing and technical investing.

1. Fundamental investing: Rich Dad said, “a fundamental investor reduces risk looking for value and growth by looking at the financials of the company.” The most important consideration for selecting a good stock for investment is the future earnings potential of the company. A fundamental investor carefully reviews the financial statements of any company before investing in it. The fundamental investor also takes into account the outlook for the economy as a whole as well as the specific industry in which the company is involved. The direction of interest rates is a very important factor in fundamental analysis.

investor invests on the emotions of the market and invests with insurance from catastrophic loss. The most important consideration for selecting a good stock for investment is based on the supply of and demand for the company's stock. The technical investor studies the patterns of the sales price of the company's stock. Will the supply of the shares of stock being offered for sale be sufficient based on the expected demand for those shares?

The technical investor tends to buy on price and market sentiment…just like a shopper shops for sales and discounted items. In fact, many technical investors are like my Aunt Doris. Aunt Doris goes shopping for bargains and sales with her lady friends , buying items because they are cheap, marked down, or because her friends are buying them. Then she gets home, wonders why she bought the item, tries it on and then takes it back for a refund so she can have money to go shopping again.

The technical investor studies the pattern of the history of the company's stock price. A true technical investor is not concerned with the internal operations of a company as a fundamental investor would be. The primary indicators the technical investor is concerned with are the mood of the market and the price of the stock.

One of the reasons so many people think the subject of investing is risky is because most people are technically operating as “technical investors ” but don't know the difference between a technical investor and a fundamental investor. The reason investing seems risky from the technical side is because stock prices fluctuate with market emotions. Here are just a few examples of things that can cause fluctuations in stock prices:

one day a stock is popular and in the news, next week it isn't , or the company manipulates supply and demand by splitting the stock, diluting the pool with additional shares being created through such things as secondary offerings, or cutting back the number of shares by buying them back ; or an institutional buyer (like a mutual fund or pension fund) buys or sells the shares of a certain company in such volume that it disturbs the market.

Investing seems risky to the average investor because they lack the basic financial education skills to be a fundamental investor and do not have adequate technical investor skills. If they are not on the board of the company changing the supply side of the shares they have no management control over the fluctuations of supply and demand of the stock's price on the open market. They remain at the whim of the market emotions.

Many times a fundamental investor will find an excellent company with great profits but, for some reason, the technical investors will not be interested in it so the price of the company's shares will not go up, even though it is a profitable well managed company. In today's market, many people are investing in IPO's of internet companies which have no sales or profits. That is a case of technical investors determining the value of a company's stock.

Since 1995, people operating strictly as fundamental investors have not done as well as investors who also consider the technical side of the market. In this wild market where the people who take the most risk win, people with more cautious and value oriented views lost out on this market mania. In fact, many of these risk takers frightened many technical investors as well with their high prices of stock without any value. But in a crash, it is those investors with the strong fundamental investments and technical trading skills who do well. The amateur speculators rushing into the market as well as all the new start up IPOs flush with money will be hurt in the down turn. Rich dad said, “The trouble with getting rich quickly without a parachute is that you fall farther and faster . Lots of easy money makes people think they are financial geniuses when in fact, they become financial fools. ” Rich dad believed that both technical as well as fundamental skills were important to survive the ups and downs of the world of investing.

Charles Dow of Dow-Jones fame was a technical investor. That is why The Wall Street Journal, the paper he helped found, is primarily a paper written for technical investors, and not necessarily for fundamental investors.

The difference between the two investment styles is dramatic. The fundamental investor analyzes the company from its financial statements to assess the company's strength and potential for future success. In addition, the fundamental investor tracks the economy and the industry of the company.

A technical investor invests from charts that track the price and volume trends and patterns of the company's stock. The technical investor may review the put/call ratio for the stock as well as the short positions taken in the stock. While both investors invest from the facts, they find their facts from different sources of data. Also, both types of investors require different skills and different vocabulary. The frightening thing is that most of today's investors are investing without technical or fundamental investor skills. In fact, I'll bet most new investors today do not know the difference between a fundamental and technical investor.

Rich dad used to say, “Qualified investors need to be well versed in both fundamental analysis as well as technical analysis.” He would draw the following diagrams for me. These diagrams are why we developed our products the way we did. We want people to be able to learn to be financially literate and to teach their children to be financially literate at a young age, as rich dad taught me.

I am often asked, “Why does a qualified investor need to understand both fundamental investing as well technical investing?” My answer is found in one word: “confidence.” Average investors feel that investing is risky because:

1. They are on the outside trying to look into the inside of the company or property they are investing in. If they do not know how to read financial statements, they are totally dependent on others' opinions. If only at an unconscious level, people know that insiders have better information and therefore lower risk.

2. If people cannot read financial statements, their personal financial statements are often a mess. And as rich dad said, “If a person's financial foundation is weak, his or her self-confidence is also weak. ” A friend of mine, Keith Cunningham, often says, “The main reason people do not want to look at their personal financial statements is that they might find out they have financial cancer. ” The good news is that once they cure the financial disease, the rest of their lives also improves—and sometimes even their physical health too.

3. Most people know how to make money only when the market is going up, and they live in terror of the market coming down. If a person understands technical investing, he or she has the skills to make money when the market goes down as well as when it goes up. The average investor without technical skills makes money only in a rising market, often losing all he or she has gained in a falling market. Rich Dad said, “a technical investor invests with insurance from huge losses. The average investor is like a person flying a plane without a parachute.”

As rich dad often said about technical investors, “The bull comes up by the stairs and the bear goes out the window.” A bull market will rise slowly, but when it crashes, the market is like a bear going out the window . Technical investors are excited about market crashes because they position themselves to make money quickly when average investors are losing their money, money that often increased very slowly.

So the chart of various investors and their returns often looks like this: Market

Many investors often lose because they wait too long to get into the market. They are so afraid of losing that they wait too long for proof that the market is going up. As soon as they enter , the market peaks and crashes and they end up losing on the way down.

Qualified investors are less concerned about the market going up or going down. They enter confidently, with a trading system for an up-trending market. When the market reverses, they will often change trading systems, exiting their previous trades and using short selling, and put options to profit while the market comes down. Having multiple trading systems and strategies helps them have more confidence as investors.

The average investor lives in fear of the market crashing or prices coming down. You can often hear them say, “What if I buy a stock and the price comes down?” Hence many average investors fail to take advantage of profit opportunities in an up market and a down market. A qualified investor looks forward to the ups and downs of a market. When prices go up, they have the skills to minimize risk and earn a profit regardless if the price is going up or coming down. A qualified investor will often “hedge” their positions which means they are protected if the price goes down suddenly or goes up suddenly. In other words they have a good chance of making money in either direction while protecting themselves from losses.

Today, with such a hot market, I often hear new investors say with confidence, “I don't have to worry about a market crash because this time, things are different. ” A seasoned investor knows that all markets go up and all markets come down. Today as I write, we are in one of the biggest bull markets in the history of the world. Will this market come crashing down? If history holds any stories, then we should be in for one of the biggest crashes the world has ever seen. Today people are investing in companies without any profits…which means a mania is on. The diagrams on the previous page are diagrams of past bubbles, manias, or booms and busts the world has gone through.

Sir Issac Newton who lost most of his fortune in the South Sea Bubble is quoted as saying, “I can calculate the motions of heavenly bodies, but not the madness of people.” Today, in my opinion, there is madness. Everyone is thinking about getting rich quick in the market. I am afraid that we may soon see millions of people lose everything simply because they invested in the market, some borrowed money to invest, instead of first investing in their education and experience. At the same time, I am excited because many people will soon be selling in a panic and that is when the qualified investor really becomes wealthy.

It is not the crash that is so bad but the emotional panic that occurs at the times of such financial disasters/opportunities. The problem with most new investors is that they have not yet been through a real bear market…since this current bull market started in 1974. Many mutual fund managers were not yet born or barely born in 1974 so how would they know what a market crash and bear market feels like, especially if it goes on for years , such as the Japanese market has done.

Rich dad simply said, “It is not possible to predict the market, but it is important that we be prepared for whichever direction it decides to go.” He also said, “Bull markets seem to go on forever, which causes people to become sloppy, foolish, and complacent. Bear markets also seem to go on forever causing people to forget that bear markets are often the best times to become very, very rich. That is why you want to be a qualified investor .”

In his book, The Lexus and the Olive Tree, a book I strongly recommend for anyone wanting to understand the new era of global business we are in, author Thomas L Friedman often makes reference to The Electronic Herd. The electronic herd is a group of several thousand, very often young, people who control great sums of electronic money. They are the individuals who work for large banks, mutual funds, hedge funds, insurance companies, and the like. They have the power with the click of their mouse to move literally trillions of dollars from one country to another country in a split second. That power gives the electronic herd more power than politicians.

I was in South East Asia in 1997 when the electronic herd moved their money out of countries like Thailand, Indonesia, Malaysia, and Korea, virtually sinking those countries' economies over night. It was not a pretty sight nor was it pleasant to be physically present in those countries.

For those of you who invest globally, you may recall how most of the world, even Wall Street was singing praises to the new Asian Tiger Economies. Everyone wanted to invest in these countries . Then suddenly, literally over night, their world changed. There were murders, suicides, riots, looting, and a general feeling of financial sickness everywhere. The electronic herd did not like what it saw in those countries and moved their money out in a matter of seconds.

“Think of the Electronic Herd as being like a herd of wildebeests grazing over a wide area of Africa. When a wildebeest on the edge of the herd sees something move in the tall, thick brush next to where it's feeding, that wildebeest doesn't say to the wildebeest next to it, ‘Gosh, I wonder if that's a lion moving around there in the brush. ' No way. That wildebeest just starts a stampede, and those wildebeests don't stampede for a mere hundred yards. They stampede to the next country and crush everything in their path. ”

That is what happened to the Asian Tigers in 1997. The Electronic Herd did not like what they saw going on in the area and moved out literally overnight. It went from high optimism to riots and murder in a matter of days.

That is why I predict that market crashes will come faster and more severely in the Information Age.

The way some of these countries are protecting themselves from the power of the Electronic Herd is by cleaning up and tightening up their national financial statements and increasing their financial requirements and standards. In his book Thomas Friedman writes:

Standards: “If you were writing a history of the American capital markets, ” Deputy Treasury Secretary Larry Summers once observed, “I would suggest that the single most important innovation shaping that capital market was the idea of generally accepted accounting principles. We need that internationally. It is a minor, but not insignificant, triumph of the IMF that in Korea somebody who teaches a night school class in accounting told me that he normally has 22 students in his Winter term, and this year (1998) he has 385. We need that at the corporate level in Korea. We need that at the national level.”

Years ago rich dad said a similar thing, but he was not referring to an entire country as Larry Summers is in this quote. Rich dad was referring to any individual who wanted to do well financially. Rich dad said, “The difference between a rich person and a poor person is much more than how much money they make. The difference is found in their financial literacy and the standards of importance they put on that literacy. Simply put, poor people have very low financial literacy standards, regardless of how much money they make.” He also said, “People with low financial literacy standards are often unable to take their ideas and create assets out of them. Instead of creating assets, many people create liabilities with their ideas just because of low financial literacy standards.”

Rich dad often said, “The reason most average investors lose money is because it is often easy to invest into an asset, but it is often difficult to get out. If you want to be a savvy investor you need to know how to exit an investment as well as how to get into the investment.” Today when I invest, one of the most important strategies I must consider is what is called my “exit strategy.” Rich dad put the importance of an exit strategy in these terms so I could understand it's importance. He said, “Buying an investment is often like getting married. In the beginning things are exciting and fun. But if things do not go well, then the divorce can be much more painful than all that initial excitement and fun. That is why you must really think about an investment almost like a marriage. Because getting in is often a lot easier than getting out.”

Both my dads were very happily married men. So when rich dad talked about divorce, he was not encouraging people to get divorced he was just advising me to think long term. He said, “The odds are 50% of all marriages will end in divorce and the reality is nearly 100% of all marriages think they will beat those odds. ” And that may be why so many new investors are buying IPO's, buying shares from the more seasoned investors. Rich dad's best words on this subject were, “Always remember that when you are excitedly buying an asset there is often someone who knows more about the asset who is excitedly selling it to you!”

When people learn to invest by playing the CASHFLOW games, one of the technical skills they learn is when to buy and when to sell. Rich dad said, “When you buy an investment you should also have an idea of when to sell it, especially investments offered to Accredited Investors and above. In the more sophisticated types of investments, your exit is often more important than the entry strategy. When getting into such investments you should know what will happen if the investment goes well and what will happen if the investment goes bad.”

For people who want to learn the basic financial skills, we developed CASHFLOW 101. We recommend playing it at least six to twelve times. By playing 101 repeatedly, you begin to understand the basics of fundamental investment analysis. After playing 101 and gaining an understanding of the financial skills it teaches, you may want to move on to playing CASHFLOW 202. The advanced game uses the very same game board as 101, but it goes to another level, using a different set of cards and scoring sheets. In 202, you begin to learn the complex skills and vocabulary of technical trading. You learn to use trading techniques such as short selling, which is selling shares you do not own, in anticipation of the price coming down. You also learn to use call options, put options, and straddles. All of these are very sophisticated trading techniques, which all qualified investors need to know. The best thing about these games is that you learn by playing and using play money. That same education in the real world could be very expensive.

In 1950 a nun, who was a history and geography teacher in Calcutta, was called on to help the poor and to live amongst them. Instead of just talking about caring for the poor she chose to say very little and helped the poor with her actions not her words. It was because of her actions that when she did speak, people listened. She had this to say about the difference between words and actions, “There should be less talk. A preaching point is not a meeting point. There should be more action on your part.”

I chose to use games as the means of teaching the investment skills my rich dad taught me because games require more action than lecture in the teaching and learning process. As Mother Teresa said, “A preaching point is not a meeting point. ” Our games are meeting points. Games provide a social interaction for learning and helping someone else to learn. When it comes to investing, there are too many people trying to teach investing by preaching. We all know that there are certain things that are not best learned by simply reading and listening. Some things require action to be learned and games provide this elementary action step to learning.

My purpose in going beyond just writing books about money and investing, and creating games as learning tools, is to create more understanding. The more understanding people have, the more they can see the other side of the coin. Instead of seeing fear and doubt, the players begin to see opportunties they never saw before because their understanding increases each time they play the game.

Our web site is filled with stories of people who have played our games and have had their lives suddenly changed. They have learned a new understanding about money and investing, an understanding that pushed out some old thoughts and gave them new possibilities for their lives.

At the back of this book is my edumercial about the games which gives you more information on how these educational tools can assist you in increasing your understanding of money, business, and investing.

Rich dad taught me to be a business owner and investor by playing the game of Monopoly. He was able to teach his son and me so much more after the game was over when we visited his businesses and real estate. I wanted to create educational games that taught the same fundamental and technical investing skills that rich dad taught me, far beyond what is taught in Monopoly. As rich dad said, “The ability to manage cash flow and to read financial statements is fundamental to success on the B and I side of the CASHFLOW Quadrant.”

The qualified investors, both fundamental and technical, are analyzing a company from the outside. They are deciding whether to become “buying shareholders. ” Many very successful investors are happy operating as qualified investors. With the proper education and financial advice, many qualified investors can become millionaires. They are investing in businesses developed and run by others. Because they have studied and gained the financial education, they are able to analyze the company from its financial statements.

The qualified investor understands the price earnings (p/e) ratio of a stock, which is also referred to as the market multiplier. The p/e ratio is calculated by dividing the current market price of a stock by the previous year 's earnings per share. Generally, a low p/e would mean that a stock is selling at a relatively low price compared to its earnings; a high p/e would indicate that a stock's price is high and may not be much of a bargain.

The p/e ratio of one successful company may be very different from that of another successful company if the two companies are in different industries. For example, high-tech companies with big growth and high earnings generally sell at much higher p/es than low-tech or mature companies where growth has stabilized. Just look at the stocks being sold in Internet companies today: Many of them are selling at very high prices even when the companies have no earnings. The high prices in these cases reflect the market's expectation for high earnings in the future.

A qualified investor recognizes that the current p/e is not as important as the future p/e. The investor wants to invest in a company where the company's financial future is strong. In order for the p/e ratio to be helpful to the investor, much more information about the company may be needed. Generally, the investor will compare a company's ratios for the current year with that of previous years to measure the growth of the company. The investor will also compare the company's ratios with those of other companies in the same industry.

Many people today are participating in “day trading,” which has become popular due to the convenience and availability of online trading. The day trader is hoping to earn profits through buying and selling securities within a single day. The day trader is very familiar with p/e ratios. What distinguishes a successful day trader from an unsuccessful day trader is often his or her ability to see behind the p/e ratio. For the most part, successful day traders have taken the time to learn the basics of technical or fundamental trading. Day traders without proper financial education and financial analysis skills are operating more like gamblers than traders. Only the most educated and successful day traders would be considered qualified investors.

In fact, it has been said that the majority of new day traders lose some or all of their capital and quit trading within two years. Day trading is an extremely competitive S quadrant activity in which the most knowledgeable and best prepared use everyone else's money.

Remember to get your free audio report “My Rich Dad said, ‘Profit Don't Panic,'” available at www.richdadbook3.com. Learning how to keep a cool head and invest wisely during a crash is a very important qualified investor skill. Besides, it is during a crash that many people become very rich.