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--- Begin Message ----Caveat Lector- Gary North's REALITY CHECKIssue 218 February 25, 2003 [In this issue, I test an amazing claim of a marketer, namely, that he improved his response rate by 90 to 1 by a simple change in wording in his ad's copy. Now, if this really works. . . .] RICH DAD'S PROPHECY Of all recent books, which ones do I wish I had written? No question: Robert Kiyosaki's RICH DAD, POOR DAD series. The first one has sold 11 million copies. Royalties alone have generated $22 million. Then there are the follow-up books and the game, Cashflow. I first heard of RICH DAD, POOR DAD two years ago, when I asked Peter Fortunato what would be a good book on business for my youngest child, who had just turned 18. He recommended RICH DAD, POOR DAD. Fortunato is one of the most successful investors I know, a self-made multimillionaire, as are his three compatriots: Jack Miller, John Schaub, and Jimmy Napier. All live in state income tax-free Florida. (Miller splits time in income tax-free Nevada.) All four have grown rich by purchasing single-family residences. Each has a specialty. Fortunato is the numbers man, the expert in how to structure the sales contract. I bought RICH DAD, POOR DAD. My son read my copy, then bought his own. My hope is that he follows Kiyosaki's path. I was in Sam's Club last week while my wife was shopping for food. She sent me to the discount book table to enjoy myself. There, I spotted RICH DAD'S PROPHECY. It was $13 instead of $22. I glanced through it and knew in one minute that I had to buy it. RICH DAD, POOR DAD Kiyosaki grew up in Hawaii. His father had been Superintendent of Public Instruction. His father made a good, upper middle-class salary. But eventually he lost an election and found himself unemployed. At the age of nine, the author realized that one of his friends was rich. Anyway, his friend's father was rich. He owned real estate and businesses. The two boys went to him to find out how to get rich. He took them under his wing, making them work odd jobs in the family's businesses for about 60 cents an hour. He then played Monopoly with them, teaching them real estate strategies. Note: Law professor and economist Leonard Ross, (deceased), the 1950's whiz kid TV contest winner ($100,000) at age 11, wrote in his book THE BEST that the best way to make Monopoly a realistic game is by letting all players bid up the price of a property, no matter who lands on it. This takes longer to play, but it's more like the free market. The boys' first joint venture was comic books. They spotted an opportunity. When comic a book got a month old on the store's shelf, the retailer tore off half the cover and sent it back for credit on the next one. The boys asked for the now-defaced originals at a discount. Since they were working for the store as low-paid gophers, the manager said yes. They set up a non-circulating comic book library for 25 cents per visit. They made money off their friends. Kiyosaki calls the friend's father his rich dad. Rich dad told him early that Kiyosaki's father really was poor. Poor means "unable to live off the money generated from whatever investments you own." He was dependent on a job, meaning dependent on someone else's judgment of what his services were worth. Whenever he ceased working, his income would fall. He owned a home, but the mortgage was costing him. He was trapped in a large consumer's debt on the assumption that the house was an asset. To capitalize on the asset, he would have to move out and live elsewhere, cheaper. The secret to wealth, according to rich dad, is owning assets that produce positive cash flow. Rich people buy assets that produce cash flow. They buy them for wholesale prices, improve them, and thereby become owners of retail assets. They use debt to enable them to buy these assets. The debts are paid off by purchasers of whatever benefits the assets produce. Basically, this is a variation of Jack Miller's rule: "The best way to become a millionaire is to borrow a million dollars and have someone else pay it off." Miller has done this many times. The RICH DAD, POOR DAD books are easily read books that describe the general rules that the rich dad taught, and then explain them. His friend Mike inherited his father's multimillion dollar empire and turned it into a billion dollar empire. There is one Web site that is highly critical of the series. It claims that Kiyosaki's story has changed over the years, and therefore may have elements of fiction. http://www.johntreed.com/Kiyosaki.html Well, maybe. If the accusation is true, he should not have done it. But I have seen no carefully documented critical report on him. Reed is his main critic on the Web. In reading his books, what impresses me is that he offers sensible advice. The fact that Pete Fortunato has used similar strategies to accumulate a lot of homes also impresses me. The series is not a how-to book on real estate. It's about a way of looking at your economic future. It's the story of entrepreneurship in action. That's why I recommend his books. DYING RICH In his new book, Kiyosaki describes his own business failure at age 32. It's painful to read. It taught him many lessons. So did the second failure. Let this be a warning to all would-be rich people: these failures happened over two decades after he had first been taken under the rich dad's wing. By 47, he had retired. But he has not really retired. He is still building capital. He keeps writing best- selling books. What author wouldn't? He still keeps his nose to the grindstone and his eyes on the ledger. This is what I have also seen in the Florida Four: they work all the time. They do deals. They are so good at doing deals that they cannot resist. They have too much fun amassing ever-greater wealth. Kiyosaki speaks of a recent real estate deal of his that involved property worth $10 million. He obviously does such deals all the time. But, in terms of the income he lives on, he no longer needs to do deals to support himself. He hasn't since age 47. He still is amassing assets, just as his rich dad did. He uses the money thrown off by his empire to built it up. This is the free market's way. Consumers keep throwing money at successful entrepreneurs who serve their wants efficiently. "Don't quit. Do it again. Here. We'll pay you not to quit." So, they don't quit. Warren Buffett is the best example. He doesn't have to work at his age. Yet, he never quits. In my view, this is a huge mistake. I'll write about this in detail one of these days. The problem the super- rich face is the one that was described to me by free market economist Ben Rogge three decades ago: "Rich people know how to make money. They don't know how to give it away." What happens almost every time is that they set up tax-exempt foundations that are eventually taken over by anti-capitalistic bureaucrats who use the rich man's legacy to finance their causes, not his causes, assuming he had any. The only billionaires who don't lose in this deal are people like Buffett, who hold the same views as the bureaucrats. Buffett plans to transfer his assets to a foundation that will promote population control. It will be the richest foundation on earth, in all likelihood. He does not hold his father's free market views. His father was the Ron Paul of Congress in the late 1940's. If you amass an empire, you are responsible for seeing to it that the empire will survive intact. Adding to it only defers your first problem, which is how to keep it intact after the IRS gets through with your heirs. Your second problem is not destroying your heirs, which happens so often, and keep it out of the hands of your ideological opponents. Kiyosaki is still in the build-it stage, as is Buffett. Entrepreneurs almost never see themselves as having moved into the give it away stage. They die as builders. They just love to build. The bureaucrats inherit. The main exception to death in the still-building phase was Andrew Carnegie, who sold his steel-making empire in 1900, and who spent the rest of his life letting hired bureaucrats give the money away. He re-shaped America economically with cheap steel, and then he re-shaped it politically with his hired help. As an entrepreneur, he was a blessing. As a philanthropist, he was a very mixed blessing. He was good at making money, but not so good at giving it away. --- Advertisement --- What's a "One Day Wonder"? How About 4.5 Times Your Money In 48 Hours? And a chance to get back the money you've lost in the market - safely, with confidence. Using this sophisticated, scientific stock selection system to uncover little-known stocks (all under $7 a share) could help you recover the money you've lost in the market this year. How? Many are on the verge of predictable, explosive price moves upwards of between 100% and 550%... And many post their gains within 24 to 72 hours. Interested? Click here for more... http://www.agora-inc.com/reports/PNY/DreamOfWealth/ ----------------------- DYING POOR This volume is the best of the bunch. It describes a prediction made by the rich dad in the late 1970's. He had read the ERISA law: the Employee Retirement Income Security Act of 1974. He taught Kiyosaki that laws change the future. You must read them carefully and think through their implications. Few investors do. The rich dad spotted the flaw: the government transferred to business owners the right to offer a new kind of retirement program to workers. This is the defined contribution program. The worker decides how much he will invest each year. In the defined benefit plans, the employer provides a guaranteed monthly payout. What the book doesn't discuss, but should have, is that the 1974 law came in the midst of a terrible inflation, 1968-82. From 1977 to 1980, commodity prices soared. So did home prices. So did gold. After 1979, so did interest rates. This sent investors a message: "Inflation will destroy your retirement if it's a defined benefit program." In fact, everything since 1940 had sent this message. This was the background of the stock market boom of 1982-March, 2000. The 401(k) retirement programs were the product of ERISA. Businesses encouraged employees to invest in the companies' shares. One result was Enron. Kiyosaki discusses Enron as the best example of a government-created plan that is guarantee to fail. Why will it fail? The rich dad had spotted the problem by 1979. Those people who are salary-oriented are not entrepreneurs. They will not build businesses and portfolios that throw off enough cash flow to support them in retirement. Kiyosaki calls this the ESBI problem. E = employee S = self-employed business owner B = big business owner I = investor The ES people rarely have the inclination, stomach, and skills to create an asset base large enough to support them in retirement. Yet these people after 1974 have had the power to make their investment decisions. They are at the mercy of Wall Street, the rich dad said. They buy what each other are buying. They buy it from salaried or commissioned brokerage house sales people who do not live off their own investments. When the baby boomers begin to retire, no later than 2012, they will not have enough capital to support themselves. They will begin to sell their investments. This will produce the worst stock market crash in history, the rich dad predicted. As I was reading this, standing in Sam's Club, I knew I had to buy the book. I have been hammering at this theme for over a decade. Kiyosaki also discusses the Social Security Trust Fund, which will start going negative no later than 2017. There is no way that it will survive. So, the average baby boomer will be trapped. His retirement portfolio will begin to fall because after 2011 because he has invested in those things that the non-investor sales force has told him that he should. These salesmen talk "diversification," but in fact they sell the same kinds of investments to everyone. Almost everyone today is diversified into the same asset categories -- hence, no true diversification. This is a recipe for disaster when the age cohorts reach age 66. Note: age 65 will not be the normal retirement age for most people. I just turned 61, and I will not begin to draw Social Security until age 65 and 10 months. The law was changed. Most people who are younger than I am will not be eligible until age 67. This age of course will be raised from time to time to delay the day of reckoning: when Social Security's cupboard is bare. The rich dad told him almost a quarter century ago that his generation would not be able to retire. I was told this by a high school civics teacher back in 1959, so I have never planned on retiring. But most of my age group thinks otherwise. THE RETIREMENT TRAP "Most people will not be able to afford to retire." This is not bad news for me. I think everyone who can remain economically productive should be actively making money or else -- the super-rich -- giving it away. The consumers want us to stay in labor market. They throw money at us to keep producing. Why quit? But very few people think this way. They don't like their jobs. They don't start side businesses to retire into. They believe that Uncle Sugar is going to be there, check book in hand, when old age arrives. After all, Uncle Sugar's tax-funded indoctrinators have been telling the voters this since at least 1935. I was told this on Sunday night by Katie Kouric, the woman who gets $7 million/year to rudely interrupt people on the "Today" show. She hosts the PBS show she hosts, "Freedom." This week's segment was a defense of the post-1933 definition of freedom: security for everyone. Sunday night's episode on the Great Depression said that Franklin Roosevelt did this for America: he re-defined freedom. Indeed, he did. He offered to tax the rich to protect the little guy -- the same promise made by his political opponents of the era, Adolph Hitler and Benito Mussolini. The PBS script writer neglected to mention that side of Fascism/Nazism. The rich dad saw by 1979 where this definition of freedom is headed: to the destruction of voters' dreams. They will find themselves out of the work force, out of 401(k) money, and out of Social Security/Medicare money (at least with any purchasing power). In their years of greatest weakness, old age, they will be wiped out. Kiyosaki calls salaried living "life inside the chicken coop." This chicken coop's retirement programs are now run by foxes. He identifies the foxes as Wall Street, but he should have added Washington. His book worries more about DC (defined contribution) than DC (District of Columbia). PARETO'S RULE The situation is far worse than the book says. Pareto's law is true in capital markets. About 20% of all investors own 80% of the capital. Consider individually owned shares of American companies. The top 20% started selling their shares, 1998-2000. These people went from net investors of 8.5% disposable income in 1992 to negative 2.1% in 2000. http://www.businessweek.com/magazine/content/01_23/c3735031.htm They sold shares mainly to the pension funds, which bought in at the top. The grim fact is this: most people don't have retirement programs. I guess that about 80% of the 20% who think they are safe will find that they aren't as safe as they think they are. Dividends are low today because the 20% who control most of the money don't care about dividends today. They want asset growth. But now they're getting asset contraction, and not many dividends either. There will be a shift in their goals by 2012 or earlier. Dividends will be at the top of most older investors' priorities. The stock market will revert to more historic ratios. The P/E ratio will fall. This will happen because the stock market will fall. When the market falls, all of the corporate pension funds that today are still DB -- defined benefit -- will go into the tank. This is happening now. They have all been set up on the convenient assumption that they will make 10% per annum. They are all falling, and have been since 2000. So, companies will have to allocate money out of profits to replenish the DB pension portfolios. This will lower corporate profits, which will lower dividends, which will push the stock market lower. It's a downward spiral. We're into it now. So, rich dad's confidence in DB pension plans as distinguished from DC pension plans was misplaced. Wall Street runs them, too. They, too, are examples of the foxes guarding the chicken coop. CONCLUSION I strongly recommend that you read Kiyosaki's book. The rich dad's prophecy is going to come true. Your #1 job is to stay on the job. Abandon any thought that you will be able to retire. If you have any doubts in this regard, you won't after you read this book. So, read this book. ---------------------------- Appendix 26 The Jay Abraham testimonial #101 was so upbeat that I am skeptical. But I'll report it anyway. The man sells a product that is installed on cars, trucks, RV's, etc. He claims that it does these three things: 1. Dramatically reduces emissions 2. Increases mileage 3. Reduces repair costs To which I think, "yeah, sure, another 'suppressed product.'" I have read about them for 50 years. I think: "Why don't car manufacturers add them, since cars with better mileage would meet EPA standards on fuel economy." So, I'm a case study in his targeted market. "Show me." He used Jay's risk-reversal strategy. He says that he had previously offered a 90-day money-back guarantee. That sounds right to me. But maybe not. He changed the wording to "risk-free for 60 days." He says this raised the response rate from 1% to 90%. A 90-to-1 increase? I would have to see the audited number to believe this. But, even so, I'm curious. Here is someone making an amazing claim in a document that was not originally intended for the general public. Maybe it's true. Maybe the words "risk-free" are better than "money- back guarantee." So, let me test this proposal. Recently, I made what I regarded as an irresistible offer, which turned out to be eminently resistible. I offered to show investors how to quadruple (minimum) an investment of under $10,000, and do this on a tax-free basis in four years or less, while dramatically reducing their overall investment risk. I made this offer on a money-back guarantee basis. Maybe I mis-stated the offer with a money-back guarantee. So, I'm now offering this information on a risk-free basis. It's the same offer, of course; only the wording is different. Read my revised copy for the offer. See if sounds like a better opportunity. Send an e-mail to: [EMAIL PROTECTED] Wait 60 seconds, and then click the SEND/RECV button. ------------- -- Been to the Daily Reckoning Marketplace Yet? -- If not, you ought to see what you've been missing. Want to read more from our regular contributors? This is the place to find it. We've collected some of the best financial advice and commentary available anywhere and presented it to you all in one place. 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