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The Ultimate Investor
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So the question remains, how does a person like Bill Gates become the richest businessperson in the world in his thirties? Or how does Warren Buffet become the richest investor in America? Both men came from middle-class families so they were not handed the keys to the family vault. Yet, without great family wealth behind them, they rocketed to the apex of wealth within a span of a few years. How ? They did it how many of the ultra-rich have done so in the past and will be doing so in the future. They became ultimate investors by creating an asset that is worth billions of dollars.

The September 27, 1999, issue of Fortune ran a cover story titled “Young and Rich, the 40 wealthiest Americans under 40.” Some of these young billionaires are:

Position Name Age Wealth Business

#1 Michael Dell 34 $21.5 billion Dell Computer

#2 Jeff Bezos 35 $5.7 billion Amazon.com

#3 Ted Waitt 36 $5.4 billion Gateway Computer

#4 Pierre Omidyar 32 $3.7 billion eBay

#5 David Filo 33 $3.1 billion Yahoo!

#6 David Yang 30 $3.0 billion Yahoo!

#7 Henry Nicholas 39 $2.4 billion Broadcom

#8 Rob Glaser 37 $2.3 billion RealNetworks

#9 Scott Blum 35 $1.7 billion Buy.com

#10 Jeff Skoll 33 $1.4 billion eBay

You may notice that the top 10 of the top 40 young rich are from computer or Internet companies. Yet there were other types of businesses listed as well:

#28 Master P 29 $361 million Recording star

#29 Michael Jordan 36 $357 million Sports star

I find it interesting to note that the non-Internet-related rich people came from businesses such as a pizza company, the rap music business, and sports. Everyone else was in computers or the Internet.

Bill Gates and Warren Buffet did not make the list because they were over 40. In 1999, Bill Gates was 43 and worth $85 billion. Warren Buffet was 69 and worth $31 billion, according to Forbes.

They Made It the Old-Fashioned Way

So how did most of these people join the ranks of the ultra-rich so early in life? They made it the old-fashioned way: the same way that Rockefeller, Carnegie, and Ford became yesterday's ultra-rich and the same way that tomorrow's ultra-rich will do it. They built companies and sold shares in their company to the public. They worked hard to become selling shareholders rather than buying shareholders. In other words , it could be said that by being selling shareholders, they printed their own money—legally. They created valuable business and then sold shares of ownership in the business to others, buying shareholder.

In Rich Dad Poor Dad, I wrote about how at the age of 9, I began making my own money by melting down lead toothpaste tubes and forging lead coins in Plaster of Paris molds. My poor dad told me what the word “counterfeiting” meant. My first business opened and closed on the same day.

My rich dad, on the other hand, told me that I was very close to the ultimate formula for wealth: to print or invent your own money—legally. And that is what the ultimate investor does . In other words, why work hard for money when you can print your own? In Rich Dad Poor Dad, rich dad's lesson #5 is “the rich invent their own money.” Rich dad taught me to invent my own money with real estate or with small companies. That technical skill is the domain of the inside and ultimate investors.

How 10% Own 90% of the Shares

One reason the wealthiest 10% own 90% of all the shares, as reported in The Wall Street Journal, is that the wealthiest 10% include the ultimate investors, the people who created the shares. Another reason is that only this 10% are eligible (per SEC rules) to invest in a company at the early stages before it becomes available to the public through an IPO. In this elite group are founders of companies (a.k.a. founding shareholders), friends of the founders, or a select list of investors. These are the people who become richer and richer, while the rest of the population often struggles to make ends meet, investing the few dollars they may have left over as buying shareholders, if they have any dollars left at all.

The Difference between Selling and Buying

In other words, the ultimate investor is someone who builds a company and sells shares in his or her company. When you read an IPO prospectus, ultimate investors are the ones listed as the selling shareholders; they are not buying shareholders. And as you can tell by the net worth of these individuals, there seems to be a tremendous difference in wealth between those who sell and those who buy shares.

The Last Leg

By 1994, I felt I had successfully completed much of the plan rich dad and I had created back in 1974. I felt relatively comfortable with my abilities to manage most of the components of the B-I Triangle. I understood corporate law well enough to talk to an attorney and/or accountant. I knew the differences among the entity types (S-Corporation, an LLC, an LLP , and a C-Corporation, a limited partnership), and when to use one versus the other. I felt fairly comfortable with my ability to successfully buy and manage real estate investments. By 1994, our expenses were under control with as much as possible becoming pre-tax business expenses. We paid little in regular income tax simply because we did not have jobs in the normal sense. Most of our income was in the form of passive income with a little from portfolio income, primarily from mutual funds. We had some income from investments in other peoples' businesses.

But one day, while I was evaluating my tetrahedron, it was glaringly obvious that one leg of my tetrahedron was really weak: the leg dedicated to paper assets. My tetrahedron looked like this: In 1994, I felt good about my success. Kim and I were financially free and could afford not to work for the rest of our lives, barring financial disaster. However , it was obvious that one leg of my tetrahedron was weaker. My financial empire looked out of balance.

I took a year off in the mountains between 1994 and 1995 and spent a lot of time contemplating the idea of strengthening the last leg, paper assets. I had to decide if I really wanted to do all the work needed to strengthen it. I was doing OK financially, and in my mind, I really did not need much more in the way of paper assets to be financially secure. I was fine exactly the way I was, and I could have gotten richer and richer without paper assets.

After a year of mental turmoil and vacillation, I decided that the paper asset leg of my portfolio needed to be strengthened. If I did not do so, I would be quitting on myself. That was a disturbing thought.

I also had to decide if I wanted to invest from the outside, as most people did when it came to buying stocks in companies. In other words, I needed to decide if I wanted to be a buying shareholder and invest from the outside or learn to invest from the inside. Either would be a learning experience, almost like starting over .

It is relatively easy to get into the inside of a real estate deal or the acquisition of a small business. That is why I recommend to individuals who are serious about gaining experience of the ten investor controls to start with small deals in those types of investments. However, to get to the inside of a company before it went public, through a pre-IPO, was another story. Generally, to be invited to invest in a company before it goes public is reserved for a very elite group of people, and I did not belong to that elite group. I was not rich enough, and my money was too new for me to belong to the elite group. In addition, I do not come from the right family or university. My blood is red, not blue; my skin is not White; and Harvard has no record of me applying to its prestigious institution. I had to learn how to become part of the elite group that is invited to invest in the best companies before they go public.

I felt sorry for myself for a few moments, enjoying a brief moment of self-discrimination, a lack of self-confidence, and a strong dose of self-pity. Rich dad had already passed on, and I had no one to turn to for advice. After my few moments of misery were over, I realized that this is a free country. If Bill Gates can drop out of college, build a company, and take it public, why can't I? Isn't this why we want to live in a free country? Can't we be as rich or poor as we want? Isn't this why the barons in 1215 forced King John to sign the Magna Carta? In late 1994, I decided that since no one was going to ask me to join the insiders' club, I might have to find one and ask to be invited to join—or start my own club. The problem was that I did not know where to start, especially in Phoenix, Arizona, two thousand miles from Wall Street.

On New Year's Day 1995, my best friend Larry Clark and I hiked up to a mountaintop near our home. We went through our annual New Year 's Day ritual of discussing our past year, planning for the next year , and writing down our goals for the coming year . We spent about three hours up on the rocky peak discussing our lives; the past year ; and our hopes, dreams, and goals for the future. Larry and I have been best friends for over 25 years (we started at Xerox together in

Honolulu in 1974). He had become my new best friend because he and I had more in common than Mike and I did at that stage of my life. Mike was already very, very rich, and Larry and I were just starting out with virtually nothing but a strong desire to become very, very rich.

Larry and I spent years together as partners, starting several businesses. Many of those businesses failed even before they got off the drawing board. When he and I reflect back on some of those businesses, we laugh at how naive we were back then. Yet, some of those businesses did very well. We were partners in starting the nylon and Velcro wallet business in 1977 and developing it into a worldwide business. We became best friends through starting businesses together and have remained best friends ever since. After the nylon and Velcro wallet business began to fail in 1979, Larry moved back to Arizona and began to build his fame and fortune as a real estate developer. In 1995, Inc. Magazine named him America's fastest-growing homebuilder and he joined its prestigious list of fast-growing entrepreneurs. In 1991, Kim and I moved to Phoenix for the weather and golf, but more importantly for the millions of dollars of real estate the federal government was giving away for pennies on the dollar. Today, Kim and I are neighbors of Larry and his wife Lisa.

On that bright New Year 's Day in 1995, I showed Larry the diagram of my tetrahedron and my need to increase my paper assets leg. I shared my desire to either invest in a company before it went public, or maybe even build a company and take it public. At the end of my explanation, all Larry said was “Good luck. ” We ended that day by writing our goals on a 3x5 card and shaking hands. We wrote down our goals because rich dad had always said, “Goals have to be clear, simple, and in writing. If they are not in writing and reviewed daily, they are not really goals. They are wishes.” Sitting on the chilly mountain peak, we then went over Larry's goal of selling his business and retiring. At the end of his explanation, I shook his hand and said, “Good luck” and we hiked back down the mountain.

Periodically, I would review what I had written on that 3x5 card. My goal was simple. It was stated as, “To invest in a company before it goes public and acquire 100,000 shares or more for less than $1. 00 a share.” At the end of 1995, nothing had happened. I had not achieved my goal.

On New Year's Day 1996, Larry and I sat on the same mountain peak and discussed our results for the year . Larry's company was on the verge of being sold, but it had not yet happened. So we had not accomplished our goals for 1995. Larry was close to achieving his goal, but I seemed far away from achieving mine. Larry asked if I wanted to drop the goal or choose something new . As we discussed the goal, I began to realize that although I had written the goal, I did not believe that it was possible for me. In my soul, I did not really believe that I was smart enough, qualified enough, or that anyone wanted me to belong to that elite group. The more we talked about my goal, the angrier I got at myself for doubting myself and putting myself down so much. “After all,” Larry said, “you have paid your dues. You know how to build and run a profitable private company. Why shouldn't you be a valuable asset to a team that takes a company public?” After rewriting our goals and shaking hands, I walked down the mountain with a lot of nervousness and self -doubt because I now wanted my goal more than ever. I also walked down with more determination to have my goal become reality.

Nothing happened for about six months. I would read my goal in the morning and then go about my daily activities, which at that time was to produce my board game CASHFLOW. One day, my neighbor Mary knocked on my door and said, “I have a friend I think you should meet. ” I asked her why. All she said was, “I don't know. I just think the two of you would get along. He's an investor like you.” I trusted Mary so I agreed to meet her friend for lunch.

A week or two later, I met her friend Peter for lunch at a golf club in Scottsdale, Arizona. Peter is a tall, distinguished man who is well spoken and about the same age my own dad would have been if he were still alive. As lunch went on, I found out that Peter had spent much of his adult life on Wall Street, owning his own brokerage firm, occasionally forming companies and taking them public. He has had his own companies listed on the American Exchange, the Canadian exchanges, NASDAQ , and on the big board of The New York Stock Exchange. Not only was he a person who created assets, he was a person who invested from the other side of the coin of the public stock markets. I knew he could guide me into a world very few investors ever see. He could guide me through the looking glass, get me behind the scenes and increase my understanding of the greatest capital markets of the world.

After retiring, he had moved to Arizona with his wife and lives in relative seclusion on his own desert estate, far away from the hustle and bustle of the growing city of Scottsdale. When Peter told me that he had been involved in taking nearly 100 companies public during his career, I knew why I was having lunch with him.

Not wanting to appear too excited or overly aggressive, I did my best to control myself . Peter is a very private individual and grants time to very few people. (That is why I use the name Peter instead of his real name. He continues to prefer his anonymity. ) Lunch ended pleasantly without me discussing what I wanted to discuss. As I said, I did not want to appear too eager and naive.

For the next two months, I called asking for another meeting. Always the gentleman, Peter would politely say “No,” or avoid setting a time to get together. Finally, he said “Yes,” and gave me directions to his home way out in the desert. We set a date, and I began rehearsing what I wanted to say.

After a week of waiting, I found myself driving up to his home. The first thing that greeted me was a “Beware of dog” sign. My heart raced as I drove up his long driveway and when I saw this large black lump lying in the middle of the road. It was the dog I was supposed to be wary of, and it was a very big dog. I parked the car just in front of the dog because the dog would not move out of the way. About twenty feet separated my truck and the front door of the house, and this big dog was in between. I opened the door of my truck slowly until I realized the dog was sound asleep. I slowly stepped down from the cab of the truck, but as soon as my foot hit the gravel, the dog suddenly came to life. This big black dog stood to full height, it looked at me, and I looked at it. My heart raced as I prepared to jump back into the cab of the truck. Suddenly, the dog began wagging its stubby tail as well as its whole back end and walked forward to greet me. I spent five minutes petting and being licked to death by this large black guard dog.

My wife Kim and I have a personality rule when it comes to business: “Never do business with pets you don't trust. ” Over the years, we have discovered that people and their pets are very similar. Once, we did a real estate transaction with a husband and wife who had many pets. He loved small dogs known as “pugs,” and she loved colorful exotic birds. When Kim and I went to their house, their small cute dogs and birds appeared friendly, but once you got close to them, they were vicious. As soon as we approached them, they would snap at us and start to bark or squawk loudly and aggressively. A week after the deal was closed, Kim and I found out that the owners were just like their pets—cute on the outside but vicious on the inside. In the fine print of the contract, we had been bitten badly. Even our attorney at the time had missed the subtle bite. The investment came out all right, but since then, Kim and I have developed this new policy: If we are having any doubts about whom we are doing business with and they have pets, find a way to check out their pets. Humans are able to put forth a pleasant front and say things they really don't mean with a smile, but their pets don't lie. Over the years, we have found this simple guideline to be fairly accurate. We have found that a person's insides are reflected on his or her pet's outside. My meeting with Peter was therefore off to a good start. Besides, his big black dog's name was “Candy.”

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