Investor Lesson 6 - Getting Rich Is Automatic If You Have A Good Plan And Stick To It

My friend Tom is an excellent stock broker. He often says, “The sad thing is that nine out of ten investors do not make money.” Tom goes on to explain that while these nine out of ten investors do not lose money, they just fail to make money.

Rich dad said a similar thing to me: “Most people who consider themselves investors make money one day and then give it back a week later. So they do not lose money, they simply fail to make money. Yet they consider themselves investors.”

Years ago, rich dad explained to me that much of what people think is investing is really the Hollywood version of investing. The average person often has mental images of floor traders shouting buy/sell orders at the start of the trading day, or images of tycoons making millions of dollars in a single trade, or images of stock prices plummeting and investors diving out of tall office buildings. To rich dad, that was not investing.

I remember watching a program where Warren Buffet was being interviewed. During the course of the interview, I heard him say, “The only reason I go to the market is to see if someone is about to do something silly. ” Buffet went on to explain that he did not watch the pundits on TV or watch the ups and downs of share prices to gain his investing advice. In fact, his investing was actually done far away from all the noise and promotion of stock promoters and people who make money from so-called investment news.

Years ago, rich dad explained to me that investing was not what most people thought it was. He said, “Many people think investing is this exciting process where there is a lot of drama. Many people think investing involves a lot of risk, luck, timing, and hot tips. Some realize they know little about this mysterious subject of investing, so they entrust their faith and money to someone they hope knows more than they do. Many other so-called investors want to prove they know more than other people . . . so they invest, hoping to prove that they can outsmart the market. But while many people think this is investing, it is not what investing is to me. To me, investing is a plan, often a dull, boring, and almost mechanical process of getting rich.”

When I heard rich dad make that statement, I repeated it back to him several times. “Investing is a plan, often a dull, boring, and almost mechanical process of getting rich?” I asked. “What do you mean by a dull, boring, and almost

“That is exactly what I said and what I mean, ” said rich dad. “Investing is simply a plan, made up of formulas and strategies, a system for getting rich . . . almost guaranteed.”

“I said almost guarantees,” repeated rich dad. “There is always some risk.”

“You mean investing doesn't have to be risky, dangerous, and exciting?” I asked hesitantly.

“That's correct,” rich dad answered. “Unless, of course, you want it to be that way or you think that is the way investing has to be. But for me, investing is as simple and boring as following a recipe to bake bread. Personally, I hate risk. I just want to be rich. So I'll simply follow the plan, the recipe, or the formula. That is all investing is to me. ”

“So if investing is simply a matter of following a recipe, then how come so many people don't follow the same formula?” I asked.

“I don't know ,” said rich dad. “I've often asked myself the same question. I've also wondered why only three out of every hundred Americans is rich. How can so few people become rich in a country that was founded on the idea that each of us has the opportunity to become rich? I wanted to be rich. I had no money. So to me, it was just common sense to find a plan or recipe to be rich and follow it. Why try and make up your own plan when someone else has already shown you the way?”

Rich dad continued. “I now realize why it is so hard for most people to follow a simple plan.”

“Human beings are quickly bored and want to find something more exciting and amusing. That is why only three out of a hundred people become rich. They start following a plan, and soon they are bored. So they stop following the plan and then they look for a magic way to get rich quick. They repeat the process of boredom, amusement, and boredom again for the rest of their lives. That is why they do not get rich. They cannot stand the boredom of following a simple, uncomplicated plan to get rich. Most people think there is some magic to getting rich through investing. Or they think that if it is not complicated, it cannot be a good plan. Trust me; when it comes to investing, simple is better than complex.”

“Playing Monopoly, ” said rich dad. “Most of us have played Monopoly as children. The difference is, I did not stop playing the game once I grew up. Do you remember that years ago, I would play Monopoly by the hours with you and Mike?”

“And do you remember the formula for tremendous wealth that this simple game teaches?”

“Buy four green houses. Then exchange the four green houses for a red hotel, ” I said quietly as my childhood memories came rushing back. “You told us over and over again while you were poor and just starting out that playing Monopoly in real life was what you were doing.”

“And I did,” said rich dad. “Do you remember me taking you to see my green houses and red hotels in real life?”

“I do,” I replied. “I remember how impressed I was that you actually played the game in real life. I was only 12 years old, but I knew that for you, Monopoly was more than a game. I just didn't realize that this simple game was teaching you a strategy, a recipe, or a formula to become rich. I did not see it that way.”

“Once I learned the formula, the process of buying four green houses and then exchanging them for one red hotel, the formula became automatic. I could do it in my sleep, and many times, it seemed like I did. I did it automatically without much thinking. I just followed the plan for ten years, and one day I woke up and realized I was rich.”

“No, it wasn't. But that strategy was one of the simple formulas I followed. To me, if the formula is complex, it is not worth following. If you can't do it automatically after you learn it, you shouldn't follow it. That is how automatic investing and getting rich is, if you have a simple strategy and follow it.”

In my investment classes, there is always the cynic or doubter to the idea that investing is a simple and boring process of following a plan. This type of person always wants more facts, more data, more proof from smart people. Since I am not a technical specialist, I did not have the scholarly proof that these types of individuals demanded—that is, until I read a great book on investing.

James P. O 'Shaughnessy wrote the perfect book for people who think that investing has to be risky, complex, and dangerous. It is also the perfect book for those who want to think that they can outsmart the market. This book has the academic and numerical proof that a passive or mechanical system of investing will in most cases beat a human system of investing . . even professional

investors such as fund managers. This book also explains why nine out of ten investors do not make money.

O'Shaughnessy's best-selling book is titled What Works On Wall Street: A Guide to the Best Performing Investment Strategies of All Time. O 'Shaughnessy distinguishes between two basic types of decision-making:

2. The quantitative or actuarial method. This method relies solely on proven relationships based on large samples of data.

O'Shaughnessy found that most investors prefer the intuitive method of investment decision-making. In most instances, the investor who used the intuitive method was wrong or beaten by the nearly mechanical method. He quotes David Faust, author of The Limits of Scientific Reasoning, who writes, “Human judgment is far more limited than we think. ”

O'Shaughnessy also writes, “All (speaking of money managers) of them think they have superior insights, intelligence, and ability to pick winning stocks, yet 80 percent are routinely out performed by the S&P 500 index.” In other words, a purely mechanical method of picking stocks out performs 80 percent of the professional stock pickers. That means, even if you knew nothing about stock picking, you could beat most of the so-called well-trained and educated professionals if you followed a purely mechanical, non-intuitive method of investing. It is exactly as rich dad said: “It's automatic. ” Or , the less you think, the more money you make with less risk and with a lot less worry.

2. Most investors prefer complex rather than simple formulas. There seems to be this idea that if the formula is not complex and difficult, it can't be a good formula.

3. Keeping it simple is the best rule for investing. He states that instead of keeping things simple, “We make things complex, follow the crowd, fall in love with the story of a stock, let our emotions dictate decisions, buy and sell on tips and hunches, and approach each investment on a case-by-case basis , with no underlying consistency or strategy. ”

4. He also states that professional institutional investors tend to make the same mistakes that average investors make. O 'Shaughnessy writes, “Institutional investors say they make decisions objectively and unemotionally, but they don't.” Here's a quotation from the book Fortune and Folly: “While institutional investors' desks are cluttered with in-depth analytical reports, the majority of pension executives select outside managers based on gut feelings and keep managers with consistently poor performance simply because they have good personal relationships with them.”

5. “The path to achieving investment success is to study long-term results and find a strategy or group of strategies that make sense. Then stay on the path.” He also states, “We must look at how well strategies, not stocks, perform.”

things will be different. He writes, “People want to believe that the present is different from the past. Markets are now computerized, block traders dominate, individual investors are gone, and in their place sit money managers controlling huge mutual funds to which they have given their money. Some people think these masters of money make decisions differently, and believe that a strategy perfected in the 1950s and 1960s offers little insight into how it will perform in the future.”

But not much has changed since Sir Isaac Newton, a brilliant man indeed, lost a fortune in the South Sea Trading Company bubble of 1720. Newton lamented that he could “calculate the motions of heavenly bodies but not the madness of men.”

7. O 'Shaughnessy was not necessarily saying to invest in the S&P 500. He simply used that example as a comparison between intuitive human investors and a mechanical formula. He went on to say that investing in the S&P 500 was not necessarily the best performing formula, although it was a good one. He explained that in the last five to ten years, large cap stocks have done the best. Yet over the past 46 years of data, it was actually small cap stocks, companies of less than $25 million in capitalization, that have made the investor the most money.

The lesson was, the longer period of time for which you had data, the better your judgment. He looked for the formula that performed the best over the longest amount of time.

Rich dad had a similar view . That is why his formula was to build businesses and have his businesses buy his real estate as well as his paper assets . That formula has been a winning formula for wealth for at least 200 years. Rich dad said, “The formula I use, and the formula I am teaching you, is the formula that has created the richest individuals over a long period of time.”

Many people think the Indians who sold Manhattan Island, a.k.a. New York City, to Peter Minuit of the Dutch West India Company for $24 in beads and trinkets got a bad deal. Yet if the Indians had invested that money for an 8 percent annual return, that $24 would be worth over $27 trillion today. They could buy Manhattan back and have plenty of money left over. The problem was not the amount of money but the lack of a plan for their money.

So rich dad's simple message to me years ago was: “Find a formula that will make you rich and follow it. ” I am often disturbed when people come up to me and start telling me about the stock they bought for $5 and how it went up to $30 and they sold it. I find myself disturbed because those kinds of stories distract from their plan, their success.

Such stories of hot tips and quick cash often remind me of a story rich dad told me. He said, “Many investors are like a family taking a drive in the country. Suddenly, on the road ahead of them appear several large deer with massive horns. The driver , usually the male of the household, shouts, ‘Look at the big bucks.' The bucks instinctively bolt from the road and onto the farmland alongside the road. The driver veers the car off the road and begins chasing the big bucks across the farm and into the trees. The ride is rough and bumpy. The family is screaming for the driver to stop. Suddenly, the car goes over a stream embankment and crashes into the water below. The moral of the story is that this is what happens when you stop following your simple plan and begin chasing the big bucks. ”

Whenever I hear someone say to me, “It takes money to make money,” I cringe. I cringe because my rich dad said, “You don't have to be a rocket scientist to be rich. You don't need a college education, a high-paying job, or any money at all to start. All you have to do is know what you want, have a plan, and stick to it. ” In other words, all it takes is a little discipline. The problem when it comes to money, however, is a little discipline is often a rare commodity.

O'Shaughnessy highlights one of my favorite quotations. It comes from the famous cartoon character Pogo, who said, “We've met the enemy, and he is us. ” That statement is very true for me. I'd be a lot better off financially if I had simply listened to rich dad and just followed my formula.

1. Are you ready to find a simple formula as part of your plan and stick to it until you reach your financial goal?