In response to an earlier post, Dylan, who is a Chartered Financial Analyst and has a MBA in Finance, left the following incisive comment about a recent column by Robert Kiyosaki on Yahoo! Finance:
Mr. Kiyosaki’s columns are dreadful.
First, he doesn’t offer any concrete advice in his columns. Most of them are puff-pieces touting his own experience. Here’s an example:
“Recently, I bought 10 acres of land for $100,000. Since the land is already zoned for mobile homes, my plan is to simply subdivide the property into approximately 50 lots and sell each lot for $25,000. Do the math, and you’ll see that the 10 acres are worth a gross of $1.25 million, which is not a bad return on a $100,000 initial investment. The legal advantage is the mobile-home zoning, an advantage all the other land in the area does not have.” (Yahoo – February 7, 2006)
First, has not provided us with his actual return, only his “plan”. Second, I work as an appraiser (albeit business appraising, not real estate) and it is very, very, very rare to find an investment that will give an 1150% return in the real estate market. The market is too efficient to allow for these types of returns.
In the same column he writes: “With paper assets, you have very little control over your greatest expense — taxes. When investing in a business or real estate, you can gain a legal, competitive advantage by paying less in taxes, which increases your return on investment.”
If I invest in a Roth IRA (sorry, I’m American) I pay NO taxes…ever. If I invest in my 401k I get to deduct my investment from my current income. Lastly, even if I invest in a regular, taxable brokerage account. I control all of the tax decisions. I can match my gains with my losses to minimize capital gains taxes. I can use the wash-sale rule to reduce my basis.
If I invest in real estate, I have to pay property taxes every year. I also have to pay taxes on the net income from the property. I live in the state of Washington, which has no income tax and no intangible taxes. I can hold my stocks for 50 years and never pay taxes if I so choose.
He also writes: “When I invest in real estate, I have lots of insurance. If a building burns or a tenant falls, I have insurance to cover those risks. A mutual fund has no insurance. That is why $7 trillion to $9 trillion were lost when the market crashed in 2000. Today, in spite of not having any insurance against losses, millions of employees happily deposit their money in their 401(k).”
This statement is totally misleading, as he is not comparing the same type of risk for each investment. He says that he is covered against the risk of losing money by being sued, but he says nothing about being covered against a fall in the value of his real estate.
He only has insurance on his real estate to cover a loss should an unforeseen accident (are there any other kind?) occur. He has no insurance should the VALUE of his real estate drop. In fact, real estate is harder to hedge against a downturn in value than a stock investment, as it is impossible to buy a put option on an apartment building, while I can buy a put option for my stocks with the click of a mouse. The insurance he has against being sued is a requirement for investing in real estate. I do not need any insurance policy for investing in stocks. Thus, I save some money by not having to pay insurance premiums.
RK’s advice is very misleading. He frequently mixes types of risk (as in the previous example) and gives “puffy” advice about “knowing smart people and doing your homework”. Well, it’s always good to know smart people and to do my homework, but by comparing the risk in a decline in an investment’s value with the risk of being sued by someone he is misleading the investing public and does not appear to understand how to compare apples to apples and oranges to oranges.
