scratch-mark

Understand This

Robert Kiyosaki is dead on the money. Now, some may have qualms about his various marketing machinations: selling books, seminars, and whatnot, but I’ll tell you that when I read Rich Dad, Poor Dad, I thought it was a fresh and brilliant book for educating the financially illiterate.

So how can I say that the market is crashing even if it continues to
go up? To see the true crash, educated investors need to compare apples
to oranges, not apples to apples.

When you compare the Dow to
the Dow, or the S&P 500 to the S&P 500, that’s comparing apples
to apples. The Dow at 12,000 appears better than the Dow at 9,000, just
as an apple at $1 a pound looks better than at $1.50 a pound, even
though it’s still the same apple. All that’s happened is the price per
pound of the apple has gone up — the apple hasn’t changed.

Years
ago, my rich dad taught me to be a comparison shopper, especially when
it comes to investments. He said, "You need to understand value more
than price. Just because the price of something goes up doesn’t
necessarily mean the value has gone up."

He also told me, "If
prices go up without a corresponding increase in value, it means the
value of the asset has actually gone down." This holds true for all
assets, including stocks, bonds, and real estate.

For
example, when the price of a house goes up it doesn’t mean that the
house is more valuable. And prices going up may mean that something
else is going down in value. In today’s global markets, what’s going
down is the purchasing power of the U.S. dollar.

Bingo. Do you know what? When your S&P loaded fund gives you 11% in a year, and taxes reduce that to 8%%, guess what? You’re about 7% in the hole, because that’s what’s happening to the dollar since about 2000. Its devaluation is unprecedented in recent history.

Richard Nikoley

I'm Richard Nikoley. Free The Animal began in 2003 and as of 2021, contains 5,000 posts. I blog what I wish...from health, diet, and food to travel and lifestyle; to politics, social antagonism, expat-living location and time independent—while you sleep—income. I celebrate the audacity and hubris to live by your own exclusive authority and take your own chances. Read More

2 Comments

  1. Kyle Bennett on March 20, 2007 at 18:50

    For example, when the price of a house goes up it doesn't mean that the house is more valuable.

    I bet 9 in 10 people on the street would disagree with that. 10 out of 10 of those nutjobs over at Beyerstien's who keep insisting on assessing the objective value of Billy's guitar.

    Waht do you think of Kiyosaki's CASHFLOW ideas and the game? A bunch of us have been playing after work, and it's been an eye opener.

  2. Mark Smoler on March 23, 2007 at 14:45

    I'm sorry, but I don't understand your logic. If I make 8% on a stock after taxes in one year and that puts me about 7% in the hole, that would indicate a 15% rate of inflation? Sure, you could find a commodity like gold that has gone up that much, but gold is hardly a staple in everyday life, nor as good an indicator of inflation as it used to be. Even if you pick gold, you have to pick the proper time frame. 25 years ago, gold was almost $1000 an ounce. Using that time frame, the dollar has actually appreciated over the last 25 years. Prices of electronic goods continually go down. How much did you pay for your Pentium 1 PC 10 years ago?

    While the CPI is far from perfect, it is a closer indicator of inflation that a single arbitrary commodity like gold. Look at your personal life. Does it really take twice as much money to live the same lifestyle today as it did 5 years ago? That's what a 15% yearly rate of inflation would suggest.

    It's true that if the price of an apple goes up, it's still the same apple. I won't go into long detail on how the same apple could be worth more (or less) at a different time because of demand and other reasons. However, stocks are truly dynamic and the actually substance of what they are changes over time. Stocks are primarily valued on the expected future profits and growth potential. Today, companys are making more profits then ever, thus the value of owning a portion of that company is worth more. It is, in fact, not the same apple.

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