Wednesday, May 17, 2017

Stages of an investment bubble - Be Prepared

“Predicting the future is a loser’s game. It’s easy to be wrong and nearly impossible to be completely right…the hard part about predicting the future is actually following through on the actions that agree with your predictions. There is always more neigh sayers than believers.”

I talked about the Biblical story of Noah. He spent years and years of his life building an ark in the middle of the desert, all the while talking about a coming flood. Everyone mocked him…until the flood came. Then they all wanted on the ark, but it was too late.

In my book, Rich Dad’s Prophecy, I predicted that the biggest stock market crash in world history would happen sometime around 2016. Case in point, it is difficult to predict the future. It’s 2017 and the crash hasn’t happened yet. Many people are happy to point fingers and say, “I told you so.” But I believe the correction will still happen—and like Noah I’m preparing.

Is the crash still coming?

The 75 million baby boomers hold about $10 trillion in tax-deferred savings that they are required to withdraw, and they will do so this year and increasingly in the coming years.

In an interview with MarketWatch, I said:

“I’m not concerned about the professional investor who can short the market, go long, use options, calls and puts,” he said. “It’s the person with a 401(k) or IRA, where all their eggs are in this thing called a retirement plan.”

The professional investors on Wall Street are scared. Things are too calm in the markets. They know that a correction is coming. And when it does, the little guys will be wiped out.

Whether there is a correction this year or in the coming years, one thing is true, corrections always come. The good news is there is always opportunity in every boom and bust—if you prepare well.

Booms and busts

One key to preparing is to understand the nature of market booms and busts. This can be done by understanding history and then seeing the patterns of history in play in our world today.

Over the years, I have read several books on the subject of booms and busts. Almost all of them cover the Tulip Mania in Holland, the South Seas Bubble, and, of course, the Great Depression. One of the better books—“Can It Happen Again?”—was written in 1982 by Nobel Laureate Hyman Minsky.

In this book, he described the seven stages of a financial bubble. They are:

Stage 1: A financial shock wave

A crisis begins when a financial disturbance alters the current economic status quo. It could be a war, low interest rates, or new technology, as was the case in the dot-com boom.

Stage 2: Acceleration

Not all financial shocks turn into booms. What’s required is fuel to get the fire going. After 9/11, I believe the fuel in the real estate market was a panic as the stock market crashed and interest rates fell. Billions of dollars flooded into the system from banks and the stock market, and the biggest real estate boom in history took place.

Stage 3: Euphoria

We have all missed booms. A wise investor knows to wait for the next boom, rather than jump in if they’ve missed the current one. But when acceleration turns to euphoria, the greater fools rush in.

By 2003, every fool was getting into real estate. The checkout girl at my local supermarket handed me her newly printed real estate agent business card. The housing market became the hot topic for discussion at parties. “Flipping” became the buzzword at PTA meetings. Homes became ATM machines as credit-card debtors took long-term loans to pay off short-term debt.

Mortgage companies advertised repeatedly, wooing people to borrow more money. Financial planners, tired of explaining to their clients why their retirement plans had lost money, jumped ship to become mortgage brokers. During this euphoric period, amateurs believed they were real estate geniuses. They would tell anyone who would listen about how much money they had made and how smart they were.

Stage 4: Financial distress

Insiders sell to outsiders. The greater fools are now streaming into the trap. The last fools are the ones who stood on the sidelines for years, watching the prices go up, terrified of jumping in. Finally, the euphoria and stories of friends and neighbors making a killing in the market gets to them. The latecomers, skeptics, amateurs, and the timid are finally overcome by greed and rush into the trap, cash in hand.

It’s not long before reality and distress sets in. The greater fools realize that they’re in trouble. Terror sets in, and they begin to sell. They begin to hate the asset they once loved, regardless of whether it’s a stock, bond, mutual fund, real estate, or precious metals.

Stage 5: The market reverses, and the boom turns into a bust

The amateurs begin to realize that prices don’t always go up. They may notice that the professionals have sold and are no longer buying. Buyers turn into sellers, and prices begin to drop, causing banks to tighten up.

Minsky refers to this period as “discredit.” My rich dad said, “This is when God reminds you that you’re not as smart as you thought you were.” The easy money is gone, and losses start to accelerate. In real estate, the greater fool realizes he owes more on his property than it's worth. He's upside down financially.

Stage 6: The panic begins

Amateurs now hate their asset. They start to dump it as prices fall and banks stop lending. The panic accelerates. The boom is now officially a bust. At this time, controls might be installed to slow the fall, as is often the case with the stock market. If the tumble continues, people begin looking for a lender of last resort to save us all. Often, this is the central bank.

The good news is that at this stage, the professional investors wake up from their slumber and get excited again. They’re like a hibernating bear waking after a long sleep and finding a row of garbage cans, filled with expensive food and champagne from the party the night before, positioned right outside their den.

Stage 7: The White Knight rides in

Occasionally, the bust really explodes, and the government must step in—as it did after the 2008 crash, buying shares in companies like GM and bailing out large Wall Street banks that leveraged themselves too far.

Today, you should ask yourself what stage you think we’re in. The stock market is at an all time high. Investors are running to IPOs like Snapchat even though the company is losing money twice as fast as it did prior to its IPO. The VIX index is at its lowest in nearly 25 years.

And professional traders are saying, “a correction is coming and it will be ugly.”

I can’t tell you what will happen exactly, but I can tell you that you better be prepared.

Wednesday, May 10, 2017

High Student Loans Hurting Students and Small Businesses


College loan debt is strangling many young people in America. There’s no debate about this.

Back in 2013, the U.S. News & World Report reported, “In its ninth annual report on student loan debt, TICAS found nearly 7 in 10 graduating seniors in 2013—69 percent—left school with an average of $28,400 in student loan debt, an increase of 2 percent from 2012.”

These were astonishing numbers. All said and done, in 2012, the Wall Street Journal wrote that student loan debt eclipsed $1 trillion for the first time.

Today, things are only worse. As USA Today reports, “It was big news when outstanding student loan debt surpassed credit card debt and then later exceeded $1 trillion for the first time. That shocking statistic keeps climbing, with no sign of slowing down: Americans now have more than $1.4 trillion in unpaid education debt, according to the Federal Reserve.”

And the average student debt burden today? $30,100.

In the US, the student loan debt crisis is not going away. It’s only getting bigger. And that has big implications for our economy.

How students spend their education loans?

Perhaps you’re slightly shocked by the growth of student debt, but maybe you’re also thinking at least it’s going toward a good college education. That’s a good thing, right?

Well, aside from the fact that many graduates don’t think their degree was worth the debt, the reality is that a lot of student loan money doesn’t even go towards an education.

According to the "USA Today", "About half of students blow some of their school loan money on non-educational expenses, including 3% who spent it on alcohol and drugs, according to a new Student Loan Hero survey."

You read that right. Nearly 50 percent of college kids take out student loan money in order to spend it on things like:
    Vacations (3%)
    Restaurants (13%)
    Clothes (15%)
    Car Expenses (19%)
    Monthly expenses like mobile phones (41%)

As Andrew Josuweit, CEO of Student Loan Help, tells "USA Today", "I think they're justifying it because of future income. They're thinking, 'This is the cost of doing business, this is my overhead.'"

In other words, this is free money.

It’s mentality that money is free that leads to statements like these by debt-ridden graduates:
“I once believed that part of the American Dream was to earn a college education and this would ensure a great career and financial freedom. Unfortunately I am losing hope. I'm a mother of three, and my husband and I have been turned down from purchasing a home due to our income-to-debt ratio.”

“My debt is a life-swallowing, all-consuming, hole in my life. No college degree is worth that.”

“My life revolves around work. I'm barely able to afford rent, I'm cutting back on bills and I'm barely able to feed myself. Why? Because almost half my monthly income goes to Sallie Mae.”



Unfortunately, the student debt problem is an easy one for many to ignore. After all, if you weren’t silly enough to rack up huge amounts of student debt, it has no bearing on you, right?

Turns out that’s not entirely true.

According to the Wall Street Journal:
The higher the student-loan debt in an area, the lower the net creation of very small businesses, says a report from the Federal Reserve Bank of Philadelphia, using data culled from the Census Bureau and Equifax consumer-credit statistics.

In the study, published last year, researchers looked at student debt across the U.S. by ZIP Code and compared it with small-business formation in those areas. Between 2000 and 2010, a one-standard-deviation increase in student debt in a ZIP Code led to an average 25% reduction in the number of very small businesses, those with one to five employees.

The conclusion, the researchers believe, is that prospective entrepreneurs are so burdened with student debt that they simply can’t take on any more debt to start a business.

Perhaps you’re thinking, again, what does this have to do with you?

A ticking small-business time bomb?

Small businesses are the heart of the American economy, making 65 percent of the net new jobs over the last fifteen years according to the SBA Office of Advocacy. Now imagine what will happen to our economy if the rate of new small business creation drops as dramatically as the rate at which student loan debt has increased.

This goes to show that when it comes to economies, things are rarely self-contained and that systemic issues can come from anywhere—and they usually start with financial ignorance.

In light of this, you can begin to see why President Trump believes that tax relief for small businesses is so important.

In this case, the ignorance is regarding debt. The conventional financial wisdom is that college debt is good debt because higher education is important for getting ahead. But how’s that working out for our nation’s graduates? Not that well.

The difference between good debt and bad debt

One of the fundamental principles of Rich Dad is understanding the difference between good debt and bad debt. In my opinion, college debt is bad debt.

A financially sophisticated person understands good debt, good expenses, and good liabilities.

I remember rich dad asking me as a young man, “How many rental houses can you afford to own where you lose $100 per month?”
“Not too many,” I answered.

Then he asked me, “How many rental houses can you afford to own where you earn $100 per month?”
The answer to that question was and is, “As many as I can find!”

This simple example illustrates the difference between good debt and bad debt. In each case, I would have bought the houses with a loan, but in one case that loan and associated expenses outweighed my cash flow income. In the other, it didn’t.

The simple definition of good debt is that it puts money in my pocket. The simple definition of bad debt is it takes money out.

So, a simple question for those thinking of taking on more student loan debt: Is it really putting money in your pocket?

The answer, unfortunately and all too often, is no.

Monday, May 8, 2017

Tax advantaged investments make more sense than a 401k

In 1966, at the age of 19, I was a junior officer on board Standard Oil tankers sailing up and down the California coast. It was then that I became interested in oil. In the 1970s, I worked for an independent investment banker packaging and selling oil and gas tax shelters to wealthy clients. Today, Kim and I continue to invest in oil and gas projects.

We do not invest in stocks or mutual funds of oil companies such as BP or Exxon. We invest in oil exploration and development partnerships, which means we partner with oil entrepreneurs in specific projects, primarily in Texas, Oklahoma, and Louisiana, coincidently where many of our apartment houses are located. If successful, we receive a percentage of income from the sale of oil and natural gas, aka cash flow with tax advantages.

Oil and natural gas are essential for transportation, food, heating, plastics, and fertilizers. If you look around your kitchen, oil is in use everywhere, even in the foods you eat. The reason the government offers huge tax incentives is because drilling for oil is very risky and oil is essential for life, our economy, and our standard of living.

The beauty of some oil and gas partnerships is the ROI, return on investment. The moment Kim and I invested our $100,000 in the Texas project, we received a 70 percent tax deduction. At my ordinary-income tax rate of 40 percent, that is $28,000 cash back. That is a guaranteed 28 percent ROI in the first year, money the government technically gives back to me because they want me to invest in oil.

I mention this $28,000 return on my $100,000 investment because I receive so many calls, especially from stockbrokers saying, “I can get you a 10 percent return.” Why in the world would I want a 10 percent capital-gains return with so much market risk? I’d rather have a 28 percent guaranteed return from the government in real cash flow, and not have to gamble on fictitious possible returns on capital gains.

To me, this type of tax-advantaged investment makes more sense than investing in my 401(k) for forty years, buying, holding, and praying that I have enough money to last the rest of my life.

A Word of Caution: Drilling for oil is an extremely risky venture and that is why such investments are, by law, available only to accredited investors, investors who have the money and knowledge.



Robert Kiyosaki is a Japanese American investor and author of the popular book 'Rich Dad Poor Dad' where he wrote of his two dads. His rich dad taught him to think differently, inspired and helped him get rich on his own.

Thursday, May 4, 2017

Schools dont teach us financial education. We need financial education.


Click here if the above video does not play.


Robert Kiyosaki is a Japanese American investor and author of the popular book 'Rich Dad Poor Dad' where he wrote of his two dads. His rich dad taught him to think differently, inspired and helped him get rich on his own.

Wednesday, May 3, 2017

How I invested in real estate - real life success story

One of my favorite ways to reduce my tax burden is to invest in real estate. I’ve known many people who work in the E Quadrant but invest in real estate, which puts them into the I Quadrant. In the process, they eliminate a lot of tax burden and enjoy substantial cash flow. Many of these folks have gone on to simply invest full time in real estate.

Here's a real-life situation in which I played by the rules of the rich and minimized my taxes through rental property:

-    2004: My wife, Kim, and I put $100,000 down to purchase 10 condominiums in Scottsdale, Ariz. The developer paid us $20,000 a year to use these 10 units as sales models. So we received a 20 percent cash-on-cash return, on which we paid very little in taxes because the income was offset by the depreciation of the building and the furniture used in the models. It looked like we were losing money when we were in fact making money.

-    2005: Since the real estate market was so hot, the 380-unit condo project sold out early. Our 10 models were the last to go. We made approximately $100,000 in capital gains per unit. We put the $1 million into a 1031 tax-deferred exchange. We legally paid no taxes on our million dollars of capital gains.

-    2005: With that money, we purchased a 350-unit apartment house in Tucson, Ariz. The building was poorly managed and filled with bad tenants who had driven out the good tenants. It also needed repairs. We took out a construction loan and shut the building down, which moved the bad tenants out. Once the rehab was complete, we moved good tenants in and raised the rents.

-    2007: With the increased rents, the property was reappraised and we borrowed against our equity, which was about $1.2 million tax-free, because it was a loan—a loan that our new tenants pay for. Even with the loan, the property still pays us approximately $100,000 a year in positive cash flow.

Of the tax benefits that come with real estate investing, you can also include phantom income. Simply put, phantom income comes from things like depreciation, which means that a set portion of my property value is deducted from my taxable income each year to account for value loss as the property ages. This lowers your tax burden but isn’t a real out of pocket cost. Thus, phantom income.

As I mentioned in the example above, you can also pull money through a refinance out of your property and make money tax-free. If you do this correctly, the income from the property pays for the excess debt service. You can then use that money to invest in more property. It’s a virtuous cycle.

Also, as with any business, you can deduct a lot of expenses through your investment activities.

Those are just a few ways investing in rental property can help you reduce your tax burden. There are many more. If you’re interested, I suggest you do a deep dive and learn.

Tuesday, May 2, 2017

Business owners can deduct costs of learning

As Rich Dad Advisor Garrett Sutton teaches, most professions have requirements for continuing education. Even if they’re not required certifications, investment in business education is a must if you want to stay on top of your field.

As Garrett writes:
Internal Revenue Code Section 162 allows you to deduct 100 percent of your expenses for business-related seminars, including your registration, meals, lodging and transportation costs. The corporate entity takes the deduction and the costs are not considered part of your income (so you're not taxed on the benefits.)
Your corporation can also deduct the price of magazine subscriptions, so long as the magazines are for your industry, and you can deduct the cost of membership in professional organizations in your field. If your profession requires periodic testing and licensing, your entity can pay those fees and deduct the costs as well.

If you're looking to learn more about your chosen field, the Internal Revenue Code Section 127 allows you up to $5250 in educational assistance each year for educational expenses, which is also not included in your gross income.


Robert Kiyosaki is a Japanese American investor and author of the popular book 'Rich Dad Poor Dad' where he wrote of his two dads. His rich dad taught him to think differently, inspired and helped him get rich on his own.

Monday, May 1, 2017

Passive income is taxed favorably

The key in whatever you do is to productize. Many consultants have figured this out. For instance, graphic designers might sell posters in an online store. Or an attorney might sell a course online. What these folks have discovered is that if you can make a product that people want to buy, you can scale a business and make money even when you’re sleeping.

One key here is you need to start a business entity. This can be a LLC, a S-Corp or a C-Corp or some other suitable entity. The best thing to do is to consult an attorney and a tax adviser on the best one for you.

The advantage of a tax perspective is that passive income is the lowest taxed income. Also, you can run many expenses through a business that people in the E and S Quadrants simply cannot.