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The Inside Investor
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The inside investor is someone who is on the inside of the investment and has some degree of management control.

Although an important distinction of the inside investor is the aspect of control over management, the most important distinction rich dad pointed out was that you don't need to have a lot of income or net worth to be considered an inside investor. An officer, director , or owner of 10% or more of the outstanding shares of the corporation is an inside investor.

Most investment books are written for people who are on the outside of the world of investing. This book is written for people who want to invest from the inside.

In the real world, there is legal inside investment activity as well as illegal insider activity. Rich dad always wanted his son and me to be investors on the inside rather than the outside. It is one very important way to reduce risk and increase returns.

Someone with the financial education but not the financial resources of an accredited investor can still become an inside investor. This is where many people enter the world of investing today. By building their own companies, inside investors are building assets that they can run, sell, or take public.

In his book, What Works on Wall Street, James P. O'Shaughnessy analyzes the returns by market capitalization of various types of investments. It shows that the small stocks far outperform the other categories. A chart from his book is included for your reference on the next page.

Almost all of the high returns are found in the small microcap stocks with market capitalizations below $25 million. The down side is that these stocks are too small for mutual funds to invest in and hard to find for the average investor . As O'Shaughnessy states, “tantalizingly out of reach of nearly everyone. ” There is very little trading volume in these stocks so the ask price and bid price are usually far apart. This is an example of how 10% of the investors gain control of 90% of the shares.

If you can't find these stocks to invest in, then consider the next best thing. Build your own small cap stock company and enjoy the superior returns as the inside investor.

How I Did It

I found my financial freedom as an inside investor. Remember that I started small, buying real estate as a sophisticated investor . I learned how to use limited partnerships and corporations to maximize the tax savings and asset protection. I then started several companies to gain additional experience. With the financial education I learned from my rich dad, I built businesses as an inside investor. I did not become an accredited investor until I found success as a sophisticated investor. I have never considered myself a qualified investor. I do not know how to pick stocks and do not choose to buy stocks as an outsider . (Why would I? Being an insider is much lower risk as well as much more profitable!)

I share this with you to give you hope. If I can learn to become an inside investor through building a company, then so can you. Remember that the more controls you possess over your investment, the less risky it is.

The Investor Controls Possessed by the Inside Investor

1. The control over yourself

2. The control over income/expense and asset/liability ratios

3. The control over the management of the investment

4. The control over taxes

5. The control over when you buy and when you sell

6. The control over brokerage transactions

7. The control over the E-T-C (entity, timing, characteristic)

8. The control over the terms and conditions of the agreements

9. The control over access to information

The Three E's Possessed by the Inside Investor

1. Education

2. Experience

3. Excessive cash

Sharon's Notes

The SEC defines an “insider ” as anyone who has information about a company that has not yet been made publicly available. The Securities Exchange Act of 1934 made it illegal for anyone who had non-public

information on a company to profit from that information. This includes the insider as well as anyone to whom he or she gives a “tip” who subsequently profits from the information.

Robert's use of the word “insider” defines investors who have management control over the operations of the business. The inside investor has control over the direction of the company. An outside investor does not. Robert distinguishes between legal and illegal insider trading, and strongly opposes illegal insider trading. It is too easy to make money legally.

Creating Control

The money you invest and risk as the owner of a private business is your own. If you have outside investors, you have a fiduciary responsibility to manage their investment well, but you are able to control the management of the investment as well as access to insider information.

Buying Control

In addition to building a business on your own, you may become an inside investor through buying a controlling interest in an existing company. Buying a majority of the stock in a company allows you to acquire the controlling interest. Remember that as you increase the number of investor controls you possess, you continue to reduce your risk in the investment—that is, of course, if you possess the skill to manage the investment properly.

If you already own a business and wish to expand, you may acquire another business through merger or acquisition. The important issues in mergers and acquisitions are far too numerous to explore here. However , it is very important to seek competent legal, tax, and accounting advice before any purchase, merger, or acquisition to make sure such transactions are done properly.

To move from being an inside investor to an ultimate investor , you must decide to sell a portion or all of your business. The following questions may help you in your decision process:

1. Are you still excited about the business?

2. Do you want to start another business?

3. Do you want to retire?

4. Is the business profitable?

5. Is the business growing too rapidly for you to handle it?

6. Does your company have large capital funding needs that can

best be met through selling stock or through selling to another

business?

7. Does your company have the money and time for a public

offering?

8. Can your individual focus be diverted from the daily operations of the company to negotiate a sale or public offering without hurting the operations of the company?

10. What impact will your competitors have on a sale or public

offering?

11. If your business is strong, can you pass it on to your children or

other family members?

12. Are there well-trained and managerially strong family members

(children) to pass it on to?

13. Does the business need managerial skills that you lack?

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