Introduction
Have you ever had one of those “I should have known better” moments? Well, I’m about to share mine. Twenty years ago, as a college student, I picked up Robert Kiyosaki’s Rich Dad, Poor Dad. I skimmed through it and promptly dismissed it as just another clichéd motivational book. Now, two decades later, I realize how wrong I was to ignore its wisdom.
Back then, Kiyosaki’s advice to “pay yourself first” and “have money work for you” seemed abstract and irrelevant to my life. I was confident in my own path and didn’t see the value in these concepts. Little did I know, I was setting myself up to follow exactly the path Kiyosaki warned against.
For twenty years, I dedicated myself to being an excellent employee. My goal was to perform well enough to ask for raises or find better job opportunities. And I succeeded in that narrow aim – I became a very good employee. But as Kiyosaki had predicted, that’s all I became. I had missed the bigger picture of building wealth and financial independence.
My Misadventures in the Stock Market: A Cautionary Tale
A few years ago, I decided it was time for a change. Like many others, I thought trying my luck in the stock market might be a quick path to wealth. Without so much as a Google search on investment strategies, I dove headfirst into the cryptocurrency pool, buying $1000 worth of Bitcoin. My entire strategy was based on little more than its popularity in the news. Solid research, right?
Surprisingly, a year later, my investment had doubled. I felt like a financial genius. This initial success gave me an inflated sense of my investing abilities. Feeling confident, I immediately spent my profits on a high-end gaming laptop, missing an opportunity to reinvest or save my gains.
Bolstered by this early win, I returned to the stock market and chose four stocks that I believed would perform well. My selection process was superficial, based more on gut feeling than any real analysis.
Unfortunately, this approach backfired dramatically. All four stocks lost over 70% of their value within a year. This experience was a harsh but necessary wake-up call, teaching me that successful investing requires much more than luck or intuition.
Back to Basics: Learning from the Masters
This brutal wake-up call led me to an epiphany: maybe, I should go back to the basics of investing before risking any more of my hard-earned cash. It was time to approach this with the seriousness it deserved.
I returned to Kiyosaki’s work, this time picking up Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not! I approached it with a new mindset, ready to learn and apply its lessons.
The insights I gained from this book were invaluable. I’d like to share some of the most important lessons, hoping that Kiyosaki’s wisdom can guide others who, like me, dream of achieving financial freedom. Let’s explore the world of investing together, starting with understanding the different types of investors.
The 5 Types of Investors: Where Do You Fit In?
Kiyosaki describes five categories of investors in his book. Understanding these can help us assess our current position and set goals for where we want to be. Before we dive into these categories, let’s look at the 10 controls that successful investors should have:
- Control over yourself
- Control over income/expense and asset/liability ratios
- Control over investment management
- Control over taxes
- Control over buying and selling timing
- Control over brokerage transactions
- Control over ETC (Entity, Timing, and Characteristics)
- Control over terms and conditions of agreements
- Control over access to information
- Control over giving back (philanthropy and wealth redistribution)
As we explore each investor type, we’ll see which controls they possess and how this affects their potential for success.
The Accredited Investor: The One with the Golden Ticket
An Accredited Investor, as defined by the U.S. Securities and Exchange Commission (SEC), is an individual with an annual income of at least $200,000 ($300,000 for couples) or a net worth exceeding $1 million. This status grants access to certain investment opportunities not available to the general public.
It’s worth noting that only about 10-12% of the U.S. population qualifies as Accredited Investors. This exclusive group has access to potentially lucrative investment opportunities, but status alone doesn’t guarantee success.
Interestingly, Accredited Investors don’t necessarily possess any of the 10 controls we mentioned earlier. This explains why we sometimes hear stories of wealthy individuals losing significant portions of their wealth through poor investment decisions.
Practical Tip: While working towards Accredited Investor status, focus on building your financial literacy. Educate yourself through books, seminars, and careful practice with smaller investments. Remember, it’s not just about having money, but knowing how to manage and grow it effectively.
The Qualified Investor: The Educated Strategist
A Qualified Investor is well-versed in both fundamental and technical investing. They understand how to analyze a company’s financial health and market trends to make informed investment decisions.
Fundamental investors dig deep into company financials, analyzing growth potential and determining whether a stock is undervalued or overvalued. Warren Buffett is a prime example of a successful fundamental investor.
Technical investors, on the other hand, focus on market trends and historical price patterns. They use various indicators and charts to predict future price movements, regardless of a company’s underlying financials.
A true Qualified Investor is proficient in both these approaches, allowing them to make well-rounded investment decisions in various market conditions.
Qualified Investors have typically gained three of our 10 controls:
- Control over yourself
- Control over income/expense and asset/liability ratios
- Control over buying and selling timing
Practical Tip: To become a Qualified Investor, start by learning the basics of both fundamental and technical analysis. Choose a few stocks to practice analyzing from both perspectives. Consider using paper trading to apply your skills without financial risk.
The Sophisticated Investor: The Strategic Planner
The Sophisticated Investor possesses all the skills of a Qualified Investor, plus they’ve mastered control over ETC (Entity, Timing, and Characteristics). This means they understand different types of business entities, can time their investments for tax advantages, and grasp the nuances of various income types.
Sophisticated Investors also embody the “3 Es”:
- Education (continuous learning)
- Experience (practical knowledge gained over time)
- Excessive cash (capital available for investments)
This type of investor represents a level of financial acumen we should all strive to achieve.
Practical Tip: To evolve into a Sophisticated Investor, start by learning about different business entities and tax strategies. Consider consulting with a financial advisor or tax professional to understand how to optimize your investments. Remember, knowledge in this area can significantly impact your financial outcomes.
The Inside Investor: The Business Owner
The Inside Investor is typically an entrepreneur or business owner. They don’t just invest in businesses; they create and manage them. This hands-on approach gives them a unique advantage in the investment world.
Inside Investors often possess all 10 investor controls. This comprehensive control allows them not only to have the most potential for success but also to manage risk more effectively. When you’re steering the ship, you have a better chance of avoiding obstacles.
Many of the wealthiest individuals fall into this category. Even Warren Buffett, known primarily for his stock market investments, is technically an Inside Investor through his management of Berkshire Hathaway.
Practical Tip: Consider starting a small business or side hustle. The goal is to begin thinking like a business owner, understanding cash flow, and learning to create value in the market. These skills are invaluable, even if you don’t ultimately become a full-time entrepreneur.
The Ultimate Investor: The Market Leader
The Ultimate Investor represents the pinnacle of investment success. They are Inside Investors whose businesses have become so successful that they can take their companies public. This allows them to raise significant capital for expansion while also potentially cashing in on some of their equity.
Reaching this level is the dream of many entrepreneurs and investors. It represents not just financial success, but also the creation of a business that has substantial market impact.
Practical Tip: While becoming an Ultimate Investor might seem like a distant goal, start by thinking big. Set ambitious goals for your business or investments. Study the stories of successful entrepreneurs who’ve taken their companies public. Every journey begins with a single step.
Where Do I Start? The Beginner’s Guide to Leveling Up
If you’re wondering where you fit in among these investor types, you’re not alone. Most of us, myself included, start without the “3 Es” (Education, Experience, and Excessive cash). So how do we progress?
Robert Kiyosaki’s advice is to start as an Inside Investor by building your own business. This approach allows you to gain all 10 investor controls while simultaneously working on your “3 Es”.
Starting a business might sound daunting, but it doesn’t have to be a large-scale operation from the beginning. It could be a side project or a small online venture. The key is to start thinking like a business owner and understanding how to create value in the market.
I’ll admit, I ignored this advice for over 20 years, content in my role as an employee. But as the saying goes, it’s better late than never. I may not be at the beginning of my career anymore, but I’m not ready to give up on my financial goals.
Conclusion: Your Financial Journey Begins Now
As we conclude this exploration of investor types, let’s recap some key insights:
- Continuous learning is crucial, regardless of your current financial status.
- You can start small, but always think big when it comes to your financial future.
- Consider starting a business as a path to greater financial control.
- Learn from both successes and failures in your financial journey.
- It’s never too late to start working towards financial freedom.
Remember, every financial expert was once a beginner. We might be starting at the first level, but with persistence, education, and application of these principles, we can progress towards becoming more sophisticated investors.
I’m committing to minding my own business and taking control of my financial future starting today. Will you join me on this journey? Let’s learn, grow, and work towards our financial goals together.
What’s your next step on your investing journey? Are you ready to level up your financial knowledge and skills? Share your thoughts and experiences in the comments below. Let’s create a community of learning and support as we navigate this financial landscape together.
