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Investor Lesson 3 - Why Investing Is Confusing
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One day, I was waiting in rich dad's office and he was speaking on the phone. He was saying things such as, “So you're long today?” and “If the prime drops, what will that do to the spread?” and “OK , OK, OK , now I understand why you're buying an option straddle to cover that position” and “You're going to short that stock? Why not use a put option instead of a short?”

After rich dad put his phone down, I said, “I have no idea what you were talking about. Investing seems so confusing.”

Rich dad smiled and said, “What I was talking about was not really investing.” “It wasn't investing? Then what was it? It sounded like what investors on TV and in the movies sound like. ”

Rich dad smiled and laughed, saying, “First of all, investing means different things to different people. That is why it seems so confusing. What most people call investing is not really investing. People are all talking about different things yet they often think they are talking about the same thing.”

“What?” I said, screwing up my face. “People are talking about different things yet thinking they are talking about the same thing?”

Again rich dad laughed. The lesson had begun.

Investing Means Different Things to Different People

As rich dad began the lesson that day, he repeatedly stressed that main point. Investing means different things to different people. The following are some of the highlights of this important lesson:

1. Rich dad explained some of the differences in value.

a. Some people invest in large families. A large extended

family is a way to ensure care for the parents in their

old age.

b. People invest in a good education, job security, and

benefits. The individual and his or her marketable skills become the assets.

c. Some people invest in external assets. In America, about 45% of the population owns shares in companies. This number is growing as people realize that job security and lifetime employment are less and less guaranteed.

There Are Many Different Investment Products

2. Here is a sample of some of the different types of investments:

a. Stocks, bonds, mutual funds, real estate, insurance, commodities, savings, collectibles, precious metals, hedge funds, etc.

b. Each one of these groups can then be broken down into different subgroups. Let's take stocks, for example.

Stocks can be subdivided into:

1. Common stock

2. Preferred stock

3. Stocks with warrants

4. Small cap stock

5. Blue chip stock

6. Convertible stock

7. Technical stock

8. Industrial stock

9. And on and on and on

Real estate can be subdivided into:

1. Single family

2. Commercial office

3. Commercial retail

4. Multi-family

5. Warehouse

6. Industrial

7. Raw land

8. Raw land to the curb

9. And on and on and on

Mutual funds can be subdivided into:

1. Index fund

2. Aggressive growth fund

3. Sector fund

4. Income fund

5. Closed end fund

6. Balanced fund

7. Municipal bond fund

8. Country fund

9. And on and on and on

Insurance can be subdivided into:

1. Whole, Term, Variable Life

2. Universal, Variable Universal

3. Blended (whole and term in one policy)

4. First, second, or last to die

5. Used for Funding Buy-Sell Agreement

6. Used for Executive Bonus and Defferred

Compensation

7. Used for Funding Estate taxes

8. Used for Non Qualified retirement benefits

9. And on and on and on

c. There are many different investment products, each designed to do something different. That is another reason why the subject of investing is so confusing.

There Are Different Investment Procedures

3. Rich dad used the word “procedure” to describe the technique, method, or formula for buying, selling, trading, or holding these investment products. The following are some of the different types of investment procedures:

1. Buy, hold, and pray (long)

2. Buy and sell (trade)

4. Option buying and selling (trade)

5. Dollar cost averaging (long)

6. Brokering (trade no position)

7. Saving (collecting)

4. Many investors are classified by their procedures and their products.

For example:

1. I am a stock trader

2. I speculate in real estate.

3. I collect rare coins.

4. I trade commodity future options.

5. I am a day trader .

6. I believe in money in the bank.

These are all examples of different types of investors, their product specialties,

and their investing procedure. All of this adds to the confusion on the subject of

investing because under the banner of investing there are people who are really:

a. Gamblers

b. Speculators

c. Traders

d. Savers

e. Dreamers

f. Losers

Many of these individuals call themselves investors and, technically they are, which is why the subject of investing is even more confusing.

No One Is an Expert at Everything

“Investing means different things to different people.” Rich dad also said, “There is no one person who can possibly be an expert at the entire subject. There are many different investment products and many different investment procedures. ”

Everyone Has a Bias

A person who is good at stocks will say, “Stocks are your best investment. ” A person who loves real estate will say, “Real estate is the basis of all wealth. ” Someone who hates gold will say, “Gold is an obsolete commodity.”

All of this personal bias from so-called experts adds to the confusion that shrouds the subject of investing.

Same Market, Different Directions

Adding to the confusion is that everyone has a different opinion on the direction of the market and the future of the world. If you watch the financial news stations, they will have one so-called expert who says, “The market is over-heated. It will crash in the next six weeks.” Ten minutes later, another expert will come on and say, “The market is set to go up even further. There will be no crash.”

Late to the Party

A friend of mine recently asked, “Every time I hear of a hot stock, by the time I buy it, the stock is heading down. So I buy at the top because it's the hot popular stock and then a day later it starts heading down. Why am I always late to the party?”

Another complaint I often hear is: “The stock drops in price so I sell it, and the next day it goes up. Why does that happen?”

I call this the “late to the party” phenomenon or the “you sold too early”

phenomenon. The problem with investing in something because it's popular or rated as the #1 fund for the past two years is that real investors have already made their money in that investment. They were in it early and got out at the top. For me, nothing is more frustrating than to hear someone say, “I bought it at $2 a share and it's now at $35 a share. ” Such stories or hot tips do me no good and only frustrate me. That is why today, when I hear such tales of instant wealth and fast money in the market, I just walk away and choose not to listen . . . because such stories are not really stories about investing.

This Is Why Investing Is Confusing

Rich dad often said, “Investing is confusing because it is a very large subject. If you look around you, you'll see that people have invested in many different things. Look at your appliances. Those are all products from companies that people invested in. You receive your electricity from a utility company that people invest in. Once you understand that, then look at your car, the gas, the tires, seat belts, windshield wipers, spark plugs, the roads, the stripes on the road, your soft drinks, the furniture in your house, the shopping center your favorite store is in, the office buildings, the bank, the hotels, the airplane overhead, the carpet in the airport, etc. All of these things are there because someone invested in the business or building that delivers you the things that make life civilized. That is what investing really is all about.”

Rich dad often ended his lessons on investing with this statement: “Investing is such a confusing subject for most people because what most people call investing is not really investing. ”

In the next chapter, rich dad guides me into reducing the confusion and into what investing really is.

Mental Attitude Quiz

Investing is a vast subject with many different people having as many different opinions :

1. Do you realize that investing means different things to different

people?

Yes_____ No_____

2. Do you realize that no one person can know all there is to know

about the subject of investing?

Yes_____ No_____

3. Do you realize that one person may say an investment is good and another person may say the same investment is bad, and realize both could have valid points?

Yes_____ No_____

4. Are you willing to keep an open mind to the subject of investing and listen to different points of view on the subject?

Yes_____ No_____

5. Are you now aware that focusing on specific products and procedures may not necessarily be investing?

Yes_____ No_____

6. Do you realize that an investment product that is good for one

person may not be good for you?

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