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You’re not half as smart as you think you are. That’s the message in Nassim Nicholas Taleb’s book, The Black Swan: The Impact of the Highly Improbable. I sure wish Robert Kiyosaki (famed author of the Rich Dad Poor Dad never-ending series of books) would read The Black Swan. For our purposes today, Taleb argues that we convince ourselves that the world is more orderly and coherent than it really is. We look back at historical events and mistakenly believe we can make sense out of it all, that we can fill in the right causes for all the effects we see. The problem is, we can’t. And for those really unexpected events, he calls them Black Swans, from the once long held belief that since all observable swans are white, Black Swans don’t exist. Trouble is, they do.

Well Kiyosaki takes all this to a new level. In his most recent column published in Yahoo! Finance, he showcased himself as the greatest prophet of our time, or as I like to say, The Great Black Swan Hunter. His article, When the Squeeze is On, Bargains Abound, is here, but please allow me to deconstruct his article for you. And there is a point to all of this (several actually), and I’ll return to them at end of the post.

I Told You So

First, Rich Dad tells us that he told us so:

I know it’s not polite to say “I told you so,” but early this year I wrote two columns here predicting that what happened in August [market "mini-crash"] might be coming. Well, it did, and I told you so.

At first I thought who cares; so he predicted that something might happen. That’s not a prediction, it’s a truism. But never to disappoint, he followed up later in his article with his clear prediction: “The August stock market mini-crash I predicted. . . .” Ok, so there it is. Early in 2007, Rich Dad predicted the stock market “mini-crash” in August. Now my first reaction was, “What, the market crashed in August! This I gotta see!”

So off to the charts I went. It turns out, though, that the markets were UP in August, not down. On July 31, 2007, the S&P500 closed at 1455.27, and at the end of August, it closed up for the month at 1473.99, for a monthly GAIN of more than 1%. So what is Rich Dad talking about?!!? Then I realized both my mistake and Rich Dad’s brilliance all at once. He didn’t just predict a mini-crash in August, he predicted it in “early August.” And sure enough, over a seven day period, the market was down about 6%. That’s not even a correction, so I’m not sure why he calls it a “mini-crash” or even what a mini-crash is, but at least now I’m tracking his great prediction.

So now let’s go back to the articles in early 2007 in which Robert Kiyosaki predicted that in early August of 2007 the stock market would experience a “mini-crash.”

Two Articles with Zero Predictions

The two articles he links to were written in February and March. The first was entitled, Throwing Good Money After Bad, and the second article was entitled Rich Today, Poor Tomorrow. I read both articles very carefully and here is the upshot–NEITHER PREDICTS A MARKET MINI-CRASH or EVEN DISCUSSES A MARKET MINI-CRASH. In fact, both articles are about deflation, and in one, he predicts that due to what he calls a “short squeeze,” the market will go UP:

Suddenly, all the other traders who shorted the stock need to buy shares of XYZ in order to return them. As more short tranders begin buying XYZ, the price of the stock goes up and up–from $150 to $160 to $170, for instance. This is a short squeeze in stocks. The traders who thought the price of the stock would go down are squeezed into becoming the ones who drive the price up.

So what’s going on here? Well with respect to Mr. Kiyosaki, I have no idea. I’ll leave it to you to read his articles (if you care to ) and decide for yourself. But there are several key lessons to be learned here:

1. Question Everything: Whether its a Rich Dad article, Hillary Clinton’s health care reform plan, or an article on The Dough Roller, question everything.
2. Don’t Predict Future Prices: One of my concerns from articles like Rich Dad’s is that he may actually convince people that he can predict future markets. He can’t. Even worse, he may convince unsuspecting folks that predicting future markets is key to successful investing. It isn’t.
3. Embrace Uncertainty: I’m convinced that certainty is overrated. The fact is, we live in an uncertain, unpredictable world. The sooner we realize that, the more certain our world will become.

Message to Yahoo! Finance

Hey Yahoo! Finance, when your contract with Mr. Kiyosaki expires, drop me a line.

One week ago, I wrote an article (Rich Dad Gives Lousy Advice) that was critical of Rich Dad, Poor Dad author Robert Kiyosaki’s comparison of mutual funds to playing the lottery. I’ve grown more and more concerned with the “advice” he’s been dishing out on Yahoo! Finance lately. Frankly, it’s dangerous, and I extended an invitation to Kiyosaki to explain here on The Dough Roller “just what in blazes is going on.” Well, it turns out that his article comparing mutual funds to the lottery was all a big joke (or was it?). Read the rest

I read Robert Kiyosaki’s book, Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money–That the Poor and Middle Class Do Not!, years ago. It’s a decent book, although a bit gimmicky. His discussion of the relationship between the balance sheet and the income statement is good. Basically, you want as much of your income to move to your balance sheet in the form of appreciating, income-producing assets. Although he showed a clear bias toward real estate investing, he saw mutual funds as a viable alternative. In fact, on page 126 of my copy he described mutual funds as “a good clean and simple way of investing.” While he clearly favored real estate investing, for those who didn’t want to learn what he thought was necessary to be successful in real estate, investing in mutual funds, REITs, stocks or bonds was “highly recommended” (p. 127). So far, so good.

Since Rich Dad, Poor Dad was first published in 1997, something has gone horribly wrong. Rich Dad writes articles published on Yahoo! Finance. On May 1, 2007, he wrote an article entitled, Playing the Mutual Fund Lottery. In the article, Rich Dad shares the views of Tom Wheelwright, a CPA and business owner, and describes Mr. Wheelwright’s views as “worth sharing.” Here are some of those views:

• Playing the lottery would be better than investing in mutual funds through a 401(k) or IRA

DR Response: Does this need a response?

• A large mutual fund representative claimed the fund earned 20% a year, but the average investor in the fund actually lost 2%

DR Response: I think what he is referring to is the fact that the average return for investors will vary from the fund’s reported return based on when investors buy into and sell out of the mutual fund. That is, a 20% yearly return over a five year period won’t represent the average investor’s return, because the average investor did not have his or her money in the fund the entire five years. This is now tracked by Morningstar.com and is called Investor Return, which Morningstar explains here. For example, LMVTX (Legg Mason Value Trust) reported a 2006 return of 5.9% and an Investor Return of 5.4%. Of course, this is not an indictment of mutual funds. When an investor buys or sells any asset will determine return, and in some cases, an Investor Return is higher than the funds return for a given period. For example, DODGX (Dodge & Cox Stock Fund) reported a 2006 return of 18.5% and an Investor Return of 18.6%. Further, a 20% fund return and 2% Investor Return is difficult to imagine. Hey, Rich Dad, can you tell us which fund and over what period of time?

• The tax advantages of a 401(k) are really a detriment, because you avoid paying taxes when your young (and in a lower tax bracket), and instead pay the taxes when you retire (and probably in a higher tax bracket)

DR Response: None of us knows what the tax brackets will look like when we retire. That said, for many, if not most of us, our retirement income will not put us in a higher tax bracket than we were in during most of our working years, because our retirement income will be less that we were making while employed. And of course, this says nothing about any company match we receive.

• Withdraws from 401(k) accounts are taxed as ordinary income while capital gains and dividends from taxable accounts are taxed at much lower rates

DR Response: This is a valid point, in part, although it misses two significant issues. First, capital gains and dividends have not always received the favorable tax treatment they receive today, and these tax rates could rise in the future. Second, the benefits of earning returns on the deferred taxes make up this difference in tax treatment.

• Investments in mutual funds outside of 401(k)s and IRAs are also bad, because they result in capital gains taxes when fund managers trade stock, even when the fund goes down in value.

DR Response: Oh, brother. Rich Dad, when investing in mutual funds in a taxable account, you need to consider the funds turnover–that is, how much of the fund’s investments the manager buys and sells each year. The lower the turnover, all things being equal, the lower the capital gains tax. Fund families offer tax-managed funds that are great for taxable accounts, and ETF’s are also a tax-managed alternative.

• The lottery is gambling, but so is a mutual fund. We have no control over the stock market and neither do fund managers

DR Response: We don’t have control over the residential or commercial real estate market, either. We don’t have control over interest rates or inflation. I guess Rich Dad won’t be investing in real estate any more. True, there is a lot we don’t have control over, and there is a lot we don’t know. That’s one of the reasons we do invest in a diversified portfolio of stocks and bonds over a long period of time.

• Most of a fund’s earnings support investment advisor’s and fund manager’s retirements

DR Response: A fund’s expense ratio is disclosed in its prospectus and many websites. The weighted average cost of my mutual funds is 47 basis points (just under 1/2%). There certainly are mutual funds that are far too costly, but this should not be viewed as an indictment of the entire industry.

This quote best summarizes the article: “But isn’t there a better chance of making money in a mutual fund than there is in the lottery? Hardly.” Rich Dad, I’m not sure what’s happened to your thinking since you published Rich Dad, Poor Dad, but this is an open invitation for you to explain here at The Dough Roller just what in blazes is going on!