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Investor Lesson 3 - Why Investing Is Confusing
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I am often asked questions like, “I have $10,000 to invest. What do you recommend I invest in?”

And my standard reply is, “Do you have a plan?”

A few months ago, I was on a radio station in San Francisco. The program was on investing and was hosted by a very popular local stockbroker. A call came in from a listener wanting some investment advice. “I am 42 years old, I have a good job, but I have no money. My mother has a house with a lot of equity in it. Her home is worth about $800,000 and she owes only $100, 000 on it. She said she would let me borrow some of the equity out so I could begin investing. What do you think I should invest in? Should it be stocks or real estate?”

Again my reply was, “Do you have a plan?”

“I don't need a plan,” was the reply. “I just want you to tell me what to invest in. I want to know if you think the real estate market is better or the stock market.” “I know that is what you want to know . . . but do you have a plan?” I again asked as politely as possible.

“I told you I don't need a plan,” said the caller. “I told you my mother will give me the money. So I have money. That's why I don't need a plan. I'm ready to invest. I just want to know which market you think is better, the stock market or the real estate market. I also want to know how much of my mom's money I should spend on my own home. Prices are going up so fast here in the Bay Area that I don't want to wait any longer.”

Deciding to take another tack, I asked, “If you're 42 years old and have a good job, why is that you have no money? And if you lose your mother's equity money from her home, can she continue to afford the home with the added debt? And if you lose your job or the market crashes, can you continue to afford a new house if you can't sell it for what you paid for it?”

To an estimated 400,000 listeners came his answer. “That is none of your business. I thought you were an investor. You don't need to dig into my private life to give me tips on investing. And leave my mother out of this. All I want is investment advice, not personal advice. ”

Investment Advice Is Personal Advice

One of the most important lessons I learned from my rich dad was that “Investing is a plan, not a product or procedure.” He went on to say, “Investing is a very personal plan. ”

During one of my lessons on investing, he asked, “Do you know why there are so many different types of cars and trucks?”

I thought about the question for a while, finally replying, “I guess because there are so many different types of people and people have different needs. A single person may not need a large nine-passenger station wagon but a family with five kids would need one. And a farmer would rather have a pickup truck than a two-seater sports car.”

“That's correct,” said rich dad. “And that is why investment products are often called ‘investment vehicles. '”

“They're called ‘vehicles'?” I repeated. “Why investment vehicles?”

“Because that is all they are, ” said rich dad. “There are many different

investment products, or vehicles, because there are many different people with many different needs, just as a family with five children has different needs than a single person or a farmer.”

“But why the word ‘vehicles'?” I again asked.

“Because all a vehicle does is get you from point A to point B,” said rich dad. “An investment product or vehicle simply takes you from where you are financially to where you want to be, sometime in the future, financially.”

“And that is why investing is a plan, ” I said nodding my head quietly. I was beginning to understand.

“Investing is like planning a trip, let's say from Hawaii to New York. Obviously, you know that for the first leg of your trip, a bicycle or car will not do. That means you will need a boat or a plane to get across the ocean, ” said rich dad.

“And once I reach land, I can walk, ride a bike, travel by car, train, bus, or fly to New York, ” I added. “All are different vehicles. ”

Rich dad nodded his head. “And one is not necessarily better than the other. If you have a lot of time and really want to see the country, then walking or riding a bike would be the best. Not only that, you will be much healthier at the end of the trip. But if you need to be in New York tomorrow, then obviously flying from Hawaii to New York is your best and only choice if you want to make it on time.” “So many people focus on a product, let's say stocks, and then a procedure, let's say trading, but they don't really have a plan. Is that what you are saying?” I asked.

Rich dad nodded. “Most people are trying to make money by what they think is investing. But trading is not investing. ”

“What is it, if it is not investing?” I asked.

“It's trading, ” said rich dad. “And trading is a procedure or technique. A person trading stocks is not much different than a person who buys a house, fixes it up, and sells it for a higher profit. One trades stocks; the other trades real estate. It's still trading. In reality, trading is centuries old. Camels carried exotic wares across the desert to consumers in Europe. So a retailer is also a trader in a sense. And trading is a profession. But it is not what I call investing. ”

“And to you, investing is a plan, a plan to get you from where you are to where you want to be,” I said, doing my best to understand rich dad's distinctions. Rich dad nodded and said, “I know it's picky and seems a minor detail. Yet, I want to do my best to reduce the confusion around this subject of investing. Every day, I meet people who think they're investing, but financially they're going nowhere. They might as well be pushing a wheelbarrow in a circle.”

It Takes More Than One Vehicle

In the previous chapter, I listed a few of the different types of investment products and procedures available. More are being created every day because so many people have so many different needs. When people are not clear on their own personal financial plans, all these different products and procedures become overwhelming and confusing.

Rich dad used the wheelbarrow as his vehicle of choice when describing many investors. “Too many so-called investors get attached to one investment product and one investment procedure. For example, a person may invest only in stocks or a person may invest only in real estate. The person becomes attached to the vehicle and then fails to see all the other investment vehicles and procedures available. The person becomes an expert at that one wheelbarrow and pushes it in a circle forever .”

One day when he was laughing about investors and their wheelbarrows, I had to ask for further clarification. His response was, “Some people become experts at one type of product and one procedure. That is what I mean by becoming attached to the wheelbarrow. The wheelbarrow works; it hauls a lot of cash around, but it is still a wheelbarrow. A true investor does not become attached to the vehicles or the procedures. A true investor has a plan and has multiple options as to investment vehicles and procedures. All a true investor wants to do is get from point A to point B safely and within a desired time frame. That person doesn't want to own or push the wheelbarrow.”

Still confused, I asked for greater clarification. “Look, ” he said, becoming a little frustrated, “if I want to go from Hawaii to New York, I have a choice of many vehicles. I don't really want to own them. I just want to use them. When I climb on a 747, I don't want to fly it. I don't want to fall in love with it. I just want to get from where I am to where I am going. When I land at Kennedy Airport, I want to use the taxi to get from the airport to my hotel. Once I arrive at the hotel, the porter uses a handcart to move my bags from the curb to the room. I don't want to own or push that handcart.”

“So what is the difference?” I asked.

“Many people who think they are investors get attached to the investment vehicle. They think they have to like stocks or like real estate to use them as investment vehicles. So they look for investments they like and fail to put together a plan. These are the investors who wind up traveling in circles, never getting from financial point A to financial point B.”

“So you don't necessarily fall in love with the 747 you fly on, just as you don't necessarily fall in love with your stocks, bonds, mutual funds, or office buildings . They are all simply vehicles,” I stated, “vehicles to take you to where you want to go.”

Rich dad nodded. “I appreciate those vehicles , I trust that people take care of those vehicles, I just don't get attached to the vehicles . . . nor do I necessarily want to own or spend my time driving them.”

“What happens when people get attached to their investment vehicles?” I asked.

“They think that their investment vehicle is the only vehicle, or it is the best vehicle. I know people who invest only in stocks as well as people who invest only in mutual funds or real estate. That is what I mean by getting attached to the wheelbarrow. There is not anything necessarily wrong with that type of thinking. It's just that they often focus on the vehicle rather than their plan. So even though they may make a lot of money buying, holding, and selling investment products, that money may not take them to where they want to go.”

“So I need a plan, ” I said. “And my plan will then determine the different types of investment vehicles I will need. ”

Rich dad nodded, saying, “In fact, don't invest until you have a plan. Always remember that investing is a plan . . . not a product or procedure. That is a very important lesson. ”

Mental Attitude Quiz

Before a person builds a house, he or she usually calls in an architect to draw up the plans. Could you imagine what could happen if someone just called in some people and began to build a house without a plan? Well, that is what happens to many people's financial houses.

Rich dad guided me in writing out financial plans. It was not necessarily an easy process, nor did it make sense at first. But after a while, I became very clear on where I was financially, and where I wanted to go. Once I knew that, the planning process became easier . In other words, for me, the hardest part was figuring out what I wanted. So the mental attitude questions are:

1. Are you willing to invest the time to find out where you are financially today and where you want to be financially, and are you willing to spell out how you plan to get there? In addition, always remember that a plan is not really a plan until it is in writing and you can show it to someone else.

Yes ____ No ____

2. Are you willing to meet with at least one professional financial advisor and find out how his or her services may help you with your long term investment plans?

Yes ____ No ____

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