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Guide to Investing - Notes

French Ben

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Robert Kiyosaki – Guide to Investing


Phase 1: Are you mentally prepared to be an investor?

1.     What should I invest in?

What is a good piece of advice for the average investor? à Don’t be average. 10% of the people own 90% of the stock. Never invest as an individual. Invest as a business. Most people buy, hold and pray.But a true investor makes money regardless of the market going up or down.


Investing is not risky. Being out of control is risky. There are 4 types of people: ESBI.

Employee -> self-employed -> Business owner -> investor

Laws are for the rich. You have to use their laws. 10% of the people control 90% of the wealth because they know which laws to use.

How can you be rich if you think 200K$ is a lot? It’s the minimum amount to qualify as an accredited investor. If you want to be rich, find out what everyone is doing and do the opposite.

When they say Don’t take risks, take risks.

When they say Diversify, focus

When they say Minimize debt, increase debt in your favor

When they say Decrease expenses, increase them to make yourself richer.

When they say have a job, create jobs instead.


The SEC protects poor people from bad investments, but also from the best ones. A sophisticated investor knows the 3Es: education, experience and excess cash. Many rich people and rick stars lose a lot of money, because they are accredited investors but not sophisticated investors. They may have lots of cash but no education or experience.

Sophisticated investors invest in private placements, real estate syndication and limited partnerships, IPOs, pre-initial public offerings, subprime financing, MA, loans for startups, hedge funds. If you know what you are doing, these investments are actually pretty safe. Their ROI goes from 35% to 1,000%!


2.     Pouring a foundation of wealth

You build businesses so you can get into investments for the rich. Most investments are too expensive when you buy them as an employee. Employees and self-employed = Poor Dad. Business owners an investors = Rich Dad.


3.     The choice

What are your core values? Which comes first? 90% of people choose comfort and security over wealth.

As for me, I choose to be: 1. Rich, then 2. Comfortable, then 3. Secure


4.     What kind of world do you see?

People stay poor or get rich and poor again because poverty and scarcity are the only way that they know. Competing for jobs or grades or promotions brings scarcity to your life.

It is important to see that there are 2 kinds of money problems: not enough and too much. See the possibility of having too much money.


5.     Why investing is confusing

There are many investment products: Stocks, bonds, mutual funds, real estate, insurance, commodities, savings, collectibles, precious metals, hedge funds, and others.


Stocks can be subdivided into:

• Common stock

• Preferred stock

• Stocks with warrants

• Small cap stock

• Blue chip stock

• Convertible stock

• Technical stock

• Industrial stock

• and on and on and on


Real estate can be subdivided into:

• Single family

• Commercial office

• Commercial retail

• Multifamily

• Warehouse

• Industrial

• Raw land

• Raw land to the curb

• and on and on and on


Insurance can be subdivided into:

• Whole, term, variable life

• Universal, variable universal

• Blended (whole and term in one policy)

• First, second, or last to die

• Used for funding buy-sell agreement

• Used for executive bonus and deferred compensation

• Used for funding estate taxes

• Used for non-qualified retirement benefits

• and on and on and on


There are several investment procedures:

• Buy, hold, and pray (long)

• Buy and sell (trade)

• Sell, then buy (short)

• Option buying and selling (trade)

• Dollar cost averaging (long)

• Brokering (trade no position)

• Saving (collecting)


No one is an expert at everything. Warren Buffet says “put all your eggs in one basket and watch this basket closely”.

Since there are many kinds of investors, 2 might say contradicting things.

6.     Investing is a plan, not a product or a procedure

An investment vehicle is called so because it is designated to take you from point A to point B. To do so, you need a plan. And there are different vehicles for different people

Buying a house, fixing it and selling it is not investing but trading, like buying and selling stocks.

You need at least 4 or 5 vehicles to go from NYC to Hawaii (subway + plane + taxi, etc). It’s the same – you use them; you don’t need to own them or fall in love with them. And you need several of them.


Many people focus on the vehicle (real estate, stock, etc) rather than the plan. Never start investing before you have a plan of where you want to go. Don’t build a house without drawing a plan first. A plan must be written and ready to be show, to somebody else. Meet a financial professional.


7.     Are you planning to be rich or planning to be poor?

Most people are planning to be poor. For example, by saying that it takes money to make money. In reality, it takes words. You need to learn financial words. Many people are poor because they view a liability as an asset (like a house).


8.     Getting rich is automatic if you have a good plan and stick to it

A first goal could be to learn one financial word a week. Stock selling is not investing. Many people get into it, make money and lose it again.

Investing is not about risks, timing and hot tips. It’s a long, dull, boring and mechanical process. It’s like baking a cake.

In Monopoly, you buy 4 green houses and trade them for a red hotel. Your strategy should be as easy as that. Most investors trust their personal experience or intuition more than real sets of data. And they prefer complex formulas to simple ones. Choose a strategy and stick to it until you reach your financial goal.

See how the strategy works, not stocks. The longer the period of time for which you have data, the better your judgement.

Find a formula that works and follow it. Buying at 5$ and selling at 30$ is NOT one.

Your goal is to find a simple formula as part of your plan and stick to it until you reach your financial goal.


9.     How can you find the plan that is right for you?

Meet a financial advisor or coach. Develop a written financial plan. Insurance is a good start: insurance on life, insurance on fire.

Do not suffer in silence. You need a team with :

-        A banker

-        An accountant

-        A lawyer

-        A broker

-        A bookkeeper

-        An insurance agent

-        A successful mentor

Have lunch meetings with these people on a regular basis.

Start with a simple plan, keep it simple and learn.


10. Decide now what you want to be when you grow up

A.     Start by writing a plan to be financially secure. It’s boring but it is necessary. It will take you around a month

B.     Now write a plan to be comfortable. It should be a lot more aggressive. It took Kiyosaki 4 months. Meet many advisors. Defining security is easy, but defining comfort is harder. Most people spend their lives mentally caged in financial ignorance.

You need 3 plans: one to be secure, one to be comfortable and one to be rich. Most people only have a plan to be secure, like by using tenure. Or none.


11. Each plan has a price

Realize that time has a price. A 500$ plane ticket is actually cheaper than the 100$ bus ride in terms of time. Buy time. For the third plan, you need to realize that you need to buy time.

To be secure or comfortable, give your money to professional managers or institutions who invest on the long-term. Anyone can be a millionaire if they follow a long-term plan.

Most people want to get rich quick or set up a business with no planning.

Investing at the secure and comfortable levels should be a no-brainer; it should be as easy a following s simple formula. Usually, the safer the investment, the longer you need to wait for a ROI.


12. Why investing isn’t risky

Most people are driving with their hands off the steering wheel. You need to be on the inside of deals, not outside. Ask yourself how close to the inside you are.

To be secure or comfortable, just give your money to insiders. To be rich, you need to be inside.


13. On which side of the table do you want to sit?

If you just work hard and save money, you will lose it to taxes and inflation.


14. Basic rules of investing

There are 3 kinds of income:

-        Ordinary: that’s a paycheck

-        Portfolio: paper assets (stocks, bonds). They are the most popular because they are the easiest to manage and maintain

-        Passive: real estate, royalties from patents, license,

You should always be building portfolio or passive income. A stock or piece of real estate are a security but they might not be an asset. Securities keep your money secure, but they might be liabilities.

Tales of quick money only attract losers. There is no money to be made once you hear the story. Tales of woe and misery are where the bargains are.

The security is not an asset. The investor is. That’s why the investor takes a liability and turns it into an asset. An investor is a repairman.

Many people complain about the plot of land they failed to buy and whose value grew. They come from a place of scarcity. If you educate yourself on how to spot bargains, life-changing investments are everywhere. And you can take a bad deal and turn it into a good deal.

A good investor has a plan whether the market goes up or down. If you choose to wait and see what happens and not sell, you predict yourself as being a bad investor.

If you are educated and experienced, you will find a way to get on the deal. If it’s a good one, It will attract money. When an investor invests, he has 3Es: excess cash, education and experience.

You invest in people; look at their past before giving them your money and take a piece of the business when you do.


15. Reduce risk through financial literacy

Keep it simple; if somebody cannot explain the investment in 2 minutes, it’s probably bad.

Most people think investing is risky. And these people indeed shouldn’t invest. You need control over yourself. A true investor makes money in either direction.

80% of the very rich have a business in investment. Poor people value money. Riche people value assets. Selling is a necessary skill. Learn to read a financial statement.

Every human, every business, every asset has a financial statement.


This is what you need to look at when trying to improve your business. The P/E ratio is useful but it is a number for outsiders.

After examining the financial statement of the investment, overlay it on top of your personal financial statement. And see what happen if you borrow money and balance it with income. A good investor makes 1$ + 0.30$ bonus from the government.


You need to redo your financial statement often. Your goal is to be financially independent at 45. If you are not, then you have failed. The only goal of investing is to turn income into passive income or portfolio income.

When you marry somebody or buy an used car or home, you must know what is going on inside and have professionals do a checkup. But most people never do that with the companies they invest in.

Reading a financial statement allows you to see opportunities others miss. Opportunities are found by knowing accounting, tax code, business law, corporate law.

So keep an updated financial statement.


16. Financial literacy made simple

Many people buy a liability and put it in the asset column. As asset brings cash flow to your pocket. Buying a house that is negatively geared (i.e when the government gives you a tax break on losses) is stupid. Do not invest to lose money. The law can change. It did in 1986 and those who were prepared for it made the millions that others lost. Also, you don’t know how much your “asset” will be worth in 10 years.

Do not look at average numbers on the market. They are for average investors. An sophisticated wants control.

Who are you making rich? You need to see 2 financial statements to have the whole picture. Your mortgage is the bank’s asset. To you, your house is a liability. Your savings are assets that are the bank’s liability. But your savings are taxed while your house purchase comes with a tax break.

9 out of 10 entrepreneurs dive in with little financial literacy and fail for this reason. They should take classes in accounting, finance and investing. Keep reading the financial statements of other businesses.

If you do not know financial statements well, then investing is too risky for you.


17. The magic of mistakes

In school, you get the lesson first. On the streets, you make the mistake first. By avoiding taking more risk, you avoid your weaknesses instead of confronting them. The biggest failures are people who never failed. “Success is the ability to go from one failure to another with no loss of enthusiasm” said Winston Churchill


18. What is the price of becoming rich?

You need to be able to tell apart good debt and bad debt, good losses and bad losses, tax payments vs tax incentives, how to build a business, how to fix a business how to take a business public, the procs and the cons of stocks, bonds, mutual funds, real estate, insurance products, legal structures.

Rich dad defined rich as having a 20% ROI, one million USD in income and 5 million in assets.


19. The 90/10 Riddle

You do not need money to make money. You should create assets instead of buying them. If you do not have money, use things around you: paintings, inventions, songs, real estate, renting comic books.


Most people will not find out if their investment plan was the good one until it is too late.

Would finding a good job and investing 20K a year put you in the 10%? Not sure. It’s an average investor’s idea. A better investor makes assets without money. You can create assets instead of buying them: an invention, a patent, a painting, real estate, a business, or comic books that you can rent out.


The idea of a job is from the industrial era when serfdom and slavery were abolished


Phase 2: What type of investor do you want to become?


20. Solving the 90/10 riddle

The formulate is to create an asset that buys other assets


21. Categories of investors

The 10 investor controls you need to control:

-        Yourself

-        Your income-expense ratio and asset-liability ratios

-        Management of the investment

-        Taxes

-        When to buy or sell

-        Brokerage transactions

-        ETC: Entity, Timing, Characteristics

-        Terms and conditions of the agreement

-        Access to information

-        Giving it back, philanthropy


There are 5 kinds of investors:

Ø  The accredited investor: earns lots and has high net worth

He has 200K USD annual income or 1 million net worth. He is not necessarily educated. They are only 3% of the population. Which means 97% are in the rat race.


Ø  The qualified investor: knows fundamental and technical investing

He is an outside investor who understand publicly traded stock.


Ø  The sophisticated investor: understand investing and the law

He has the 3Es. He invests with a team of advisers.


Ø  The inside investor: creates the investment.

He builds a successful business and will learn the skills needed to analyze companies from the outside.


Ø  The ultimate investor: becomes the selling shareholder

He builds a successful business, which he sells to the public.


If you have no money, start as an inside investor. Build a business and buy assets from it. Once you make 1 million, the next 10 million are easy.


22. The accredited investor

He is only rich, that’s all.

One way to true wealth through securities is through participating in the IPO of a company stock.


23. The qualified investor

For example, professional stock traders. Thy know the difference between fundamental and technical investing.

Ø  Fundamental investing

Fundamental investors look at the financial statement of a company, have an outlook on the economy, the industry and the direction of interest rates.

Ø  Technical investing

Technical investors invest on the emotions of the market and with insurance from catastrophic loss.They look at supply and demand for stock. They don’t care about the internal operations, like your aunt who buys discounted items at the grocery store and sells them back to her neighbors. This is risky as a company can manipulate supply and demand by splitting the stock, diluting the pool with additional shares like buybacks or secondary offerings. And the market can suddenly change too.


Many investors fail because they wait too long to invest. They are so afraid of losing that they wait for proof that the market is going up. As soon as they enter, the market peaks and crashes. That is when the qualified investor becomes really wealthy.


Poor people create liabilities. Rich people create assets. You must know how to exit an investment. Have an exit strategy. Plan the divorce, because it’s more painful than the marriage. 50% of marriages end in divorce and 100% think that they will beat those odds.


Keep in mind that when you are happy to buy shares or IPOs, there is someone who is happy to sell it to you, and who knows more about it than you. When you buy an asset, you should know when to sell it. The exit strategy is more important. Learn to exit with Cashflow 101 and 202.

Qualified investors analyze a company both technically and fundamentally. They use the financial statement.


The PE (price-earnings) ratio, also called market multiplier = (market price per share) / (net income per share). If it’s cheap, it’s a good bargain. The price reflects the market’s future expectation of earnings. You want a good PE ratio, but a good FUTURE ratio too. Compare the PE ratio of many years in a row. Compare it to other companies in the same industry. But look beyond that ratio.


24. The sophisticated investor

He knows

-        Tax law

-        Corporate law

-        Securities law

He uses the law as much as the investment product. He knows ETC: Entity, Timing, Characteristics


-        Entity = choice of the business structure

Employees have no control over that. Self-employed choose between sole proprietorship, a partnership (which is the worst possible because you are entitled to your share of income but are responsible for all the risk), an S corporation, an LLC, an LLP and a C corporation.

If you are an attorney, doctor, architect, dentist and choose the C corporation, your tax rate is 35% vs 15% that Kiyosaki pays because his business is a non-licensed professional-services business.


A C-corporation is usually ideal. A sole proprietorship, a partnership and an S corporation are all a part of you. If there is a lawsuit, you are personally liable. A C corp is not part of you. That is good. You want to be as poor and penniless as possible on paper. Anything with your name on it is a target for predators and lawyers. The entity allows you to own nothing and keep control.

Use insurance, trusts, limited partnerships and corporations.


C corporations expose you to double taxation: a corporation is taxed on its income and then when it declares a dividend to its shareholders, they are taxed on the dividend. The same thing can occur when an improperly structured sale of a corporation occurs and a liquidity dividend is declared. The dividend is not deductible to the corporation, but is taxable to the shareholder. Therefore, that income is taxed at both the corporate and individual level.

But Kiyosaki looks at the big picture: he grows businesses because he wants to sell them or take them public, not receive dividends. There is no taxation if no dividends are declared and profits are reinvested in the business.

C corps give you maximum flexibility. The goal of making big businesses is to sell them or make them public, not receive dividends. Most big businesses are C corps.



-        Timing

The rich want to control when they pay taxes. You can roll over your gain in investment real estate if you buy another property at a greater price. This allows you to defer paying taxes until the second property is sold, or you may choose to roll it over repeatedly, perhaps forever!


C corps can choose a different year end, like June 30th.


-        Characteristics of income

Investors control. Everybody else gambles. The game of money is the game of control.

Passive and ortfolio income are not subjected to social insurance tax. Sophisticated investors know the difference between good debt and bad debt, good expenses and bad expenses, good losses and bad losses.

Debt to acquire rental property is good. Paying for legal and tax advice is good. Depreciation from real estate is good loss, since it’s only paper loss.

To be rich, you have to change your point of view on what is risky or safe. What the poor and middle class think is secure is actually risky. During a layoff, employees lose jobs but the share price goes up.

Sophisticated investors see things that average investors don’t.



25. The inside investor

He has 10% of shares or more in the corporation. Your goal should be to become an inside investor by building your own assets. Almost all good returns come from small microcaps under 25 million USD. They are hard to find for the average investors. Kiyosaki doesn’t buy stocks. Being an insider in real estate is more profitable and lower risk. The more controls you have over your investment, the less risky it is.


26. The ultimate investor

Think Bill Gates, Warren Buffet, Richard Branson. They built giants and made them public.

The advantages of IPOs: they allow you to get cash, pay debt, raise expansion capital, raise the company’s net worth and offer stock options to employees.

The disadvantages: you are forced to disclose information to the public. An IPO is expensive, compliance is extensive, you lose some control and you can get sued by shareholders.


27. How to get rich slowly

Rich people buy assets before they pay taxes. They pay income on net income, not gross income. Self-employed people pay 35% tax, or 50% with social security, when a business can pay 0%.


28. Keep your day job and still become rich

Never take a job for money. Take a job only for the skills you will learn. If you cannot sell, you cannot be an entrepreneur. Never take a second job; build a part-time business instead.

Some business skills you must learn:

-        Communication

-        Leadership

-        Team-building

-        Tax law

-        Corporate law

-        Securities law


29. The entrepreneurial spirit

Wealth has not come from cautious investors. If you build a business, do not do it for 200K$. That’s too little for so much risk. Do it for millions and millions.

You need several sources of income, and therefore several financial statements and corporations. You need the entrepreneurial mindset. It’s not about making money; it’s because it’s fun. You don’t ask a golf player when they are going to stop playing golf.


Phase 3: How do you build a strong business?

30. Why build a business?

As a business owner, you need to be right only once. You can keep your business, sell it or make it public. To be a successful entrepreneur, you need:

-        Vision: the ability to see what others can’t

-        Courage: to act despite tremendous doubt

-        Creativity: to think outside of the box

-        Thick skin: to withstand criticism

-        The ability to delay gratification


31. The B-I triangle




Rich dad had 10 businesses in different industries. Your business must have a spiritual mission, not just to make money. It should provide fire, drive and desire.

Ford wanted to democratize the automobile. Your mission can be to provide jobs to the poor. Your mission allows the business to survive the first 5-10 years. Your mission should outlive you.



Investing is a team sport. When you are an employee or self-employed, you play against a team. They are solo players. Business owners and investors are team players.

Investing alone is super hard. Sophisticated investors have accountants, attorneys, brokers, financial advisors, insurance agents and bankers. They make a decision with their team’s input.

Don’t dream of having a boat; dream of having a team of accountants and attorneys. This will get you the boat and free time. When Kiyosaki invests, he mainly looks at the team. If they refuse to work for free or cut their salaries, he knows the true mission of their business.



Most businesses fail from the inside, not from the outside. Troops won’t follow a leader who doesn’t lead. Volunteer more. Volunteer at church, volunteer to take on projects at work. A leader is a combination of visionary, cheerleader and pitbull to make the tough calls regarding issues that distract from achieving the mission.


When you have the right mission, team and leadership, money will follow you. You will attract it from outside investors.


32. Cash flow management

Often, a perfectly good business goes down because the owners are not financially literate. Small businesses fail because they do not know the difference between profit and cash flow. As a result, very profitable businesses go broke.

When you start a business, increase sales before you make an extra purchase. Cash flow is like blood in your body.


In the startup phase

Delay taking a salary until your business is generating cash. Keep your full-time job in the meantime.


Sales and Accounts Receivable

Invoice your customers ASAP. Require payments upfront until credit has been established. Establish a minimum dollar amount before granting credit and check references on credit applications.

Establish late payment fees as part of your terms and conditions and enforce them.


Expenses and Accounts Payable

Ask for extended payments upfront. Pay timely for 2-3 months and ask for an additional extension on your payable terms. A supplier will give 30-90 days to a good customer.

When purchasing something new, increase sales first.


General cash management

-        Have an investment plan for your cash on hand

-        Establish a line of credit with your bank before you need it

-        Your current asset-liabilities ratio should be 2:1 or more

-        Your liquid assets-liquid liabilities ratio should be 1:1 or more.

-        People signing checks cannot be the ones recording them in your system

-        The person reconciling the bank statement cannot handle money


33. Communications management

The better at communicating you are and the more people you communicate with, the better your cash flow will be.

You need to be good at:

-        Human psychology: know what motivates people. Different people have different buttons. There are lots of good products, but money goes to the best communicators. Poor people are poor communicators. Usually, I find a 6-week gap between communications and cash flow.

By looking at the financial statement of a company, you can see which areas of a business are communicating and which are not.


Over the years, I have attended seminars on:

1.      Sales

2.      Marketing systems

3.      Advertising, headlines, copywriting

4.      Negotiations

5.      Public speaking

6.      Direct e-mail advertising

7.      Running a seminar

8.      Raising capital

Number 8 is the most important, but entrepreneurs also need points 1-7. The entrepreneur should be making sure that the capital is always flowing in, whether it is from sales, marketing, private sales, institutional sales, investors.

If you don’t want to do sales, then you can do nothing. If you want to be a B-quadrant person, you should be able to communicate and speak the language of the other 3 quadrants.

I am not a best-writing author; I am a best-selling author.

Unsuccessful people find their strengths and spend their lives making their strengths stronger, often ignoring their weaknesses, until one day their weaknesses cannot be ignored anymore. Successful people find their weaknesses and make them strengths.

In business, appearances do matter. You only have one chance to make a good first impression. Attractive and confident candidates get more offers.


The difference between sales and marketing

A self-employed person is often good at sales, but to be a good business owner, you must also be good at marketing. Sales is done one-on-one. Marketing is done via a system. To go from self-employed to business owner, you need to learn how to sell through a system. In marketing, you need to

-        Identify a need

-        Provide a solution and

-        Answer your customer’s questions – “what’s in for me?” with a special offer. Communicate a sense of urgency for the customer to respond.


External and internal communication

Both of them are important.


External is sales, marketing, customer service, investor relations, public relations.

Internal is sharing wins and successes with your entire team, regular meetings with employees, regular communication with advisors, human resource policies.


The most powerful communication is word-of-mouth from current customers to potential customers.


34. Systems Management

Specific individuals must head each system of a business. If one system fails then the whole business can go down, like when cash flow dries up.

Real estate is a great investment to start with because you get to tinker with all the systems. It’s stable and gives you the possibility to correct things if anything goes wrong. To find a good investment, find a poor business manager and you will find real estate bargain.

It’s easier to get a credit for real estate than other businesses. Investors invest in you because you can create a good system; they do not want to invest in a system that goes home at night. The better the system, the less dependent you are on others. McDonald’s is the best system: it’s the same everywhere in the world and it’s run by teenagers.


The role of a CEO

It is to supervise all systems and identify weaknesses before they turn into failures, like not meeting a big rise in demand. At each level of growth, the CEO must be planning the system to support the next level of growth, from production lines to credit for production needs. Systems drive both cash-flow management and communication. As your systems get better, your employees have to provide less and less effort.


Typical systems

Your systems should be automated


Daily Office Operations Systems

• Answering the telephone and 800 line system

• Receiving and opening the mail

• Purchasing and maintaining office supplies and equipment

• Faxing and emailing

• Dealing with incoming/outgoing delivery needs

• Backing up and archiving data


Product Development Systems

• Developing product and protecting it legally

• Developing packaging and collateral material (e.g., catalogs)

• Developing manufacturing method and process

• Developing manufacturing costing and bidding process


Manufacturing and Inventory Systems

• Selecting vendors

• Determining product or service warranties offered

• Establishing product or service pricing (retail and wholesale)

• Establishing reorder process for inventory production

• Receiving and storing product as inventory

• Reconciling physical inventory with accounting records


Order Processing Systems

• Taking and recording orders—by mail, fax, phone, or online

• Fulfilling and packaging the orders

• Sending the orders


Billing and Accounts Receivable Systems

• Billing customers for the orders

• Receiving payments for the orders and crediting customers for payment (whether cash, check, or credit card)

• Starting the collection process for delinquent receivables


Customer Service Systems

• Returns procedure for inventory receiving and customer payment return

• Responding to customer complaints

• Replacing defective product or performing other warranty service


Accounts Payable Systems

• Purchasing procedures and approvals required

• Payment process for supplies and inventory

• Petty cash


Marketing Systems

• Creating an overall marketing plan

• Designing and producing promotional materials

• Developing general leads and prospects

• Creating an advertising plan

• Creating a public relations plan

• Creating a direct mail plan

• Developing and maintaining a database

• Developing and maintaining a website

• Analyzing and tracking sales statistics


Human Resources Systems

• Hiring procedures and employee agreements

• Training employees

• Payroll process and benefit plans


General Accounting Systems

• Managing the accounting process with daily, weekly, monthly, quarterly, and annual reports

• Managing cash with future borrowing needs secured and available

• Budgeting and forecasting

• Reporting payroll taxes and withholding payments


General Corporate Systems

• Negotiating, drafting, and executing contracts

• Developing and protecting intellectual property

• Managing insurance needs and coverage

• Reporting and paying federal and state or other jurisdictional taxes

• Planning for federal and state or other jurisdictional taxes

• Managing and storing records

• Maintaining investor/shareholder relations

• Ensuring legal security

• Planning and managing growth


Physical Space Management Systems

• Maintaining and designing telephone and electrical systems

• Planning permits and fees

• Licensing

• Ensuring physical security


35. Legal management

A patent can cost 10K USD in attorney fees, but if it can prevent a company from stealing your idea then it’s worth it. Your IP attorney and contract attorney are some of your most important advisors because they help you create your most important assets. Bill Gates only took information, protected it and sold it to IBM.

Aristotle Onassis became a shipping giant by owning only one document: a contract from a large manufacturing company guaranteeing him the exclusive rights to transport its cargo all over the world. He didn’t have any ships.


Protect your ideas

Many businesses have started and survived only thanks to a simple piece of paper. Some of the most valuable assets you can own are patents, trademarks and copyrights. Attorney fees can be expensive but it is less expensive to set out your agreements properly in the beginning. It also allows you to focus on your business and not legal matters.

Starting a business with by buying a franchise or through and network marketing also saves you money but also lots of time. Legal counsel can help you avoid problems in the following areas:


General Corporate

• Choice of business entity

• Buy-sell agreements

• Business licenses

• Regulatory compliance

• Office lease or purchase contracts


Consumer Laws Instruments

• Terms and conditions

• Direct mail

• Product liability laws

• Truth in advertising laws

• Environmental laws



• With suppliers

• With wholesale customers

• With employees

• Uniform commercial code

• Warranties

• Jurisdiction


Labor Laws

• Human Resource issues

• Employee agreements

• Employee disputes


• Workers’ Compensation contracts


Securities and Debt Instruments:

• Equipment leasing of sales or purchase

• Loan documents

• Private placements

• IPOs


Shareholder Issues

• Corporate bylaws

• Board authority

• Stock issuance

• Mergers and acquisitions

• Spin-offs


Intellectual Property

• Work-for-hire agreements

• Nondisclosure agreements

• Copyrights

• Mask works

• Patents

• Trademarks

• Licensing of intellectual property


36. Product management

Reminder: the triangle has 5 systems: Cash Flow, Communications, Systems, Legal, Product


Many average investors focus more on the product than the rest of the business. But it’s the least important part. Having a better product does not mean much. People who say that are usually employees or self-employed. Investors and business owners look at the system behind the idea. Many of us can cook a better hamburger than McDonald’s, but few of us can build a better business system.

Ford, Edison, Gates, Buffett, Murdock Branson all acquired their wealth the same way. They found their spirit and mission, built a business, allowed others to share the dreams, the risks and the rewards. This is what you should be doing.


Many people are addicted to busyness while not building anything. Employees and self-employed people are often too hands-on. The key to success is laziness. The more hands-on you are, the less money you can make” One of the reasons so many people do not join the 90/10 investor club is that they are too hands-on when they should be seeking new ways of doing more with less and less.


Summarizing the BI triangle:

1.      Money always follows management

If any of the 5 systems are weak, the company will be weak.

2.      Some of the best investments are the ones you walk away from

If the management won’t fix any of the 5 systems that is weak, walk away. There are too many good investments out there to waste your time.

3.      The internet makes the BI triangle more available and manageable for everyone.

If you are a team player, you do not need to be good at every level of the triangle. Just become part of a team with a clear vision, a strong mission and an iron stomach.

A business needs a defined mission, a determined leader and a qualified and unified team.


Phase 4: Who is a Sophisticated Investor?

37. How a sophisticated investors thinks

You can start small, from a small hot dog stand. The BI principles needed for a big company are the same. The first million dollar is hard to make, the next 10 are easy.


The sophisticated investor understands each of the ten investor controls.

The Ten Investor Controls

The ten investor controls are control over:

-        Yourself

It’s not the investment that is risky; it’s the investor. We were not taught financial literacy in school. We were taught to be employees. Sophisticated investors look at financial statements


-        Income/expense ratio and asset/liability ratios

Middle class people accumulate more debt as they become successful. As their income increases, so does their personal debt; this is the Rat Race.

The rich have their businesses pay their expenses; they have very few personal liabilities. Personal expenses should become business expenses so they can be tax-deductible.


-        Management of the investment

An inside investor who owns enough of an interest in the investment to control the management decisions has this type of investor control. It can be as a sole owner or where the investor owns enough of an interest that he or she is involved in the decision-making process.


-        Taxes

Sophisticated investors minimize their taxes and defer them when possible. Business owners and investors can enjoy the following tax advantages: 1. social insurance tax is not deducted from portfolio income or passive income but from ordinary earned income.  2. Some taxes can be deferred indefinitely 3. C corps can pay for some expenditures before tax.


-        When you buy and when you sell

The sophisticated investor doesn’t panick and uses patience.


-        Brokerage transactions

Sophisticated investors do not only use their brokers; they track the performance of their investments and direct their broker or even operate as inside investors.


-        E-T-C (entity, timing, characteristics)

If you and your wife own a restaurant, you should have one corporation that owns the restaurant and your wife should have one that owns the building. This way many expenses can become business expenses like home office, auto deduction, health insurance, legal and accounting expenses, education expenses. Your personal income goes to zero but you saved more, and the money saved can go into a retirement fund.












Now if a customer becomes ill and sues the restaurant, only the restaurant corporation has to pay and the couple’s assets are protected.


-        Terms and conditions of the agreements

The sophisticated investor is in control over the terms and conditions of agreements where he or she is on the inside of the investment.


-        Access to information

The sophisticated investor understands the legal requirements of the SEC.


-        Giving it back, philanthropy


38. Analyzing investments

Financial ratios of a company

Gross margin percentage = gross margin (i.e sales-COGS) / sales


Net operating margin percentage = EBIT / Sales. The higher the better


Operating leverage = (gross margin – variable costs) / fixed costs.

This is the percentage of fixed costs. The higher the better


Financial leverage = (Debt + Equity) / shareholder’s equity

This is how much borrowed money is used.


Total leverage = operating leverage * financial leverage

This is the total risk the company caries in its present business. Well-run, conservatively managed publicly traded American companies usually stay under 5.


Debt to equity ratio = total liabilities / total equity.

This is how much the company is financed by outsider vs insiders. Try to stay at 1 or under. The lower the number, the more conservative the financial structure of the company.

Quick ratio = liquid assets / current liabilities

Current ratio = current assets / current liabilities.

These 2 ratios say whether the company has enough liquid assets to pay its liabilities. It should be 2 or higher.


Return on equity = net income / average shareholder’s equity

This compares the return the company is making on its shareholder’s investments compared to alternative investments.


For real estate: cash-on-cash return = positive net cash flow / down payment

Eg. You buy an apartment building for 500K$. You bring 100K and the bank 400K. It brings you 24K per year after expenses and mortgage are paid. You cash on cash return is

Cash on cash return = 24K / 100K = 24%


Real estate due diligence checklist

1. Current rent roster with paid to dates

2. List of security deposits

3. Mortgage payment information

4. Personal property list

5. Floor plans

6. Insurance policy, agent

7. Maintenance, service agreement

8. Tenant information: leases, ledger cards, applications, smoke detector forms

9. List of vendors and utility companies, including account numbers

10. A statement of structural alterations made to the premises

11. Surveys and engineering documents

12. Commission agreements

13. Rental or listing agreements

14. Easement agreements

15. Development plans, including plans and specifications and as-built architectural, structural, mechanical, electrical, and civil drawings

16. Governmental permits or zoning restrictions affecting development of the property

17. Management contracts

18. Tax bills and property tax statements

19. Utility bills

20. Cash receipts and disbursements journals pertaining to the property

21. Capital expenditure disbursement records pertaining to the property for the past five years

22. Income-and-expense statements pertaining to the property for two years prior to the submission date

23. Financial statements and state and federal tax returns for the property

24. A termite inspection in form and content reasonably satisfactory to the buyer

25. All other records and documents in Seller’s possession or under Seller’s control which would be necessary or helpful to the ownership, operation, or maintenance of the property

26. Market surveys or studies of the area

27. Construction budget or actuals

28. Tenant profiles or surveys

29. Work-order files

30. Bank statements for two years showing operating account for property

31. Certificates of occupancy

32. Title abstract

33. Copies of all surviving guarantees and warranties

34. Phase I Environmental Audit (if it exists)


Natural resources

Gold is a good thing to have.

Debt is fine if it generates more than it costs.

Investing in a building generates way more than investing in a 401k.

In a 401k, you still have to pay taxes on your income (before you can save it on the 401k) and you get zero cash flow from your investment. Whereas if you invest in real estate instead, you generate cash flow every year, your buildings appreciate every year and you can expect a 10% cash-on-cash return. The same amount brings you almost 3 times more money than the 401k.


39. The Ultimate Investor

How did the super-rich make their money? They made it the old-fashioned way, like Rockefeller, Carnegie or Ford: they built companies and sold shares to the public. They became selling shareholders instead of buying shareholders. You can make your money with real estate or with small companies.


Why 10% own 90% of the shares is also because this 10 percent is eligible to invest in a company (per SEC rules) before it becomes available to the public through an IPO. These people are the founders, friends of the founders, and a select list of investors.

These people are not buying shareholders; they are selling shareholders.


The way these select investors take company public: they find an old mine in Peru that is going bankrupt, fly there and visit it. It may have lots of problems, but the most important part of the equation is the people. Money follows management.

When the founders are seen working without pay to generate portfolio, it is clear that their interest is the same as the shareholder’s interest, which is to increase the price per share.


You might want to use the Canadian exchange rather than NASDAQ if this is the business that you understand. If you understand oil, gas, silver and gold then this is the place to be. But if you have a technology company then an American exchange is better.

Also, NASDAQ and Well Street have become too big for a small company to get attention there. Brokerage houses in America are only interested in offerings of 100 million USD or more.


Canadian exchanges let the small entrepreneurs in the business. Only there can you get into an IPO play for only 25K USD for 100,000 shares of stock. When you grow, you can move to NYSE or NASDAQ. Companies that do that usually get a 200% or more increase in the value of the company.


IPO – a difficult process

In the US, an IPO requires net tangible assets of 18 million USD and pre-tax income of 2.5 M USD. Sometimes it’s easier to merge with another company if you want to go public.


I often start my presentation to investors by saying: The investment I am about to talk about is a very high-risk speculative investment, offered primarily to individuals who meet the requirements of an accredited investor.

Make the risks clear and add: If your money is lost, all I can offer you is the first opportunity to invest in our next business. Usually 90% won’t invest in us.

It usually takes 3 to 5 years to take a company to a public market. Taking a company public is a rite of passage for any entrepreneur. If you can do it, you are an ultimate investor.


40. Are you the next billionaire?

Today, becoming a billionaire only depends on how many eyeballs you command. 90 percent of IPOs fail and 10 survive.


The flavor of the month

The IPO market is like any market: the market is always looking for the flavor of the month. The stock market always favors some businesses more than others. It you want to become very rich, part of your strategy as a business owner is to build the company that the market wants before the market wants it.


Why take a company public?

1.      You need more money

2.      Your company is new and you need to gain market share

3.      Many times, a company will use its own company stock to acquire other companies. This is printing your own money

4.      You want to sell your company without giving up control. Most shareholders have very little power to influence the operations of the company.

5.      You want to raise money for estate reasons to provide for your heirs.

6.      You want to get rich and have cash to invest elsewhere.


There are many restrictions related to selling your shares after an IPO. Your stock is usually “restricted”, you cannot sell it for quite a while. If you want to cash out, it is sometimes better to merge with another company with free-trading shares or sell the company.


Points to consider before taking a company public:

-        Who on the team has run a business?

There is a big difference between running a business and dreaming of a new product or a new business. Has the person handled payroll, employees, tax issues, legal issues, contracts, negotiations, product development, cash-flow management, raising capital, and so on?


-        How much of the company do you want to sell?

When you start your company, you should already know what you will do with it and have a concrete goal for the end of the business.


Before you build a business, you might want to consider some of these issues:

1. Are you going to sell it, keep it, or pass it on to heirs?

2. If you are going to sell it, are you going to sell it privately or publicly?

a. Selling a company privately can be as difficult as selling it publicly.

b. Finding a qualified buyer can be difficult.

c. Financing for the business may be difficult to come by.

d. You may get it back if the new owner cannot pay you or mismanages it.


-        Does the prospective public company have a well-written and well-thought-out business plan?

This plan should include descriptions of:

1. The team and team’s experience

2. Financial statements - The standard is three years of audited financials.

3. Cash-flow projections - I recommend three years of very conservative cash-flow projections.


Gates often understates Microsoft’s earning projections, which is an excellent strategy for keeping the price of the stock strong. CEOs who exaggerate earnings expectations disappoint investors and make the price of the stock fall.


-        Who is the market, how big is the market, and how much growth is possible for the company’s products in the market?

While there is a market for your products, there is another market for the shares in your business. At different times, certain types of companies are more attractive to stock buyers than other companies.

When a person has a public company, it is often said that it is like having two companies instead of one. One company is for your regular customers, and one is for your investors.


-        Who is on your board of directors or advisory board?

The market runs on confidence. If the company has a strong and respected board of directors or advisors, the market has more confidence in the future success of the business.

Frank advises, “If someone comes to you and says, ‘I’m going to take my company public,’ ask that person, ‘Who on your team has taken a company public and how many companies has he or she taken public?’ If that person cannot answer that question, ask him or her to come back with the answer. Most never come back.”


-        Does the company own something proprietary?

A business should own or control something that another company does not. It could be a patent on a new product or drug, a lease of ground in an oil field, or a trademark such as Starbucks or McDonald’s. Even people who are owners and respected experts in their field can be considered assets. Examples of people being assets are Martha Stewart, Steve Jobs when he started his Apple computer company and Steven Spielberg when he formed his production company. People invested in these people because of their past success and future potential.


-        Does the company have a great story to tell?

I am sure Christopher Columbus must have told a great story to his underwriters, the king and queen of Spain, before they raised the capital for him to sail off to the ends of the earth. A great story must interest, excite, and cause people to look into the future and dream a little. There should also be integrity behind the story, because our jails are filled with great storytellers who have no integrity.


-        Do those involved with the company have passion?

This is the most important thing that Frank looks for. He says that the first and last thing he looks for in any business is the passion of the owner, the leaders, and the team. Frank says, “Without passion, the best business, the best plan, and the best people will not become successful.”


How do you raise money?

1.      Friends and family

2.      Angels. They want to help aspiring entrepreneurs. It’s important for a city to have growing young businesses; so many cities have groups of angels. School teaches you to be an employee. If school taught you to create your business you could help your city like Gates helped Austin and Seattle.

3.      Private investors

4.      Public investors: people who buy stock


Sources of funding you should get familiar with

1.      PPMs: Private Placement Memorandums

This is the start of your capital-raising activities. Hire a corporate attorney who specialized in securities.

2.      VCs

People go to VCs after they have exhausted their friends’ and banker’s money. A VC will become a partner and help you get to the next level of financing. It’s a personal trainer for your company.

3.      Investment bankers

They help you raise money for IPO and secondary offerings.


Before IPO is also a stage called mezzanine funding (or bridge funding) for when you are not ready yet.


An important first step

If you are serious of becoming an entrepreneur, get a job at a network marketing company with a good training program and stick with it for 5 years to become a confident salesperson.

The main reason people are not financially successful is that they cannot sell. They lack self-confidence, they are afraid of rejection, they cannot ask for the order.


How to find a mentor

Get the S&P Security Dealers book and find a person willing to listen to your ideas. The ask them to be part of your team.


Becoming a millionaire is possible. Just write the goal down. If you think you can, you can. If you think you can’t then you can’t. Either way, you are right.


It is possible to become a billionaire

1.      The internet brings you a world a customers

2.      The internet gives you the power to control your own media site

3.      It does not need to be high tech. Starbucks made billions by selling coffee.

The future belongs to those who do the most with the least effort.


My plan to become a billionaire

Find an area of business that is fat, bloated, inefficient, where people are dissatisfied with the current system and whose products need improving.

Billions and billions have been spent on education, yet it remains obsolete, expensive and ready for change. American’s public schools are increasingly frustrating parents and falling behind international standards. Part of this reason is that the 6,500 USD spent on each student per year are half eaten by non-instructional services like administration.

Now the barriers between public and private education sectors are eroding. The 1,200 charter schools are free to experiment with private management without losing public money.


41. Why do rich people go bankrupt?

Most millionaires lose 3 companies before they win big.


1.      They have no idea how to handle a lot of money. They buy liabilities instead of assets

2.      They feel a ‘high’, spend like crazy, divorce an asset (their wife), turn it into a liability, and marry a new liability.

3.      They can’t say no to people who want to borrow money

4.      They become “investors” with money but no education or experience.

5.      Their fear of losing increases

6.      They can’t tell good expenses from bad expenses

If you want to know if a person is going to be richer in or poorer in the future, just look at the expense column in their financial statement. Some expenses make you rich; others make you poor. You need low income and high expenses (that make you rich)

Many entrepreneurs utilize a single corporation strategy and fail to harness the power of a multi-corporation investment strategy.


Phase 5: Giving it back

42. Are you prepared to give back?

Carnegie gave back through libraries, the Rockefellers gave through the Rockefeller Foundation. Your life will be complete when your foundation outlives you.



In the Agrarian Age, you needed to be born in an elite group to ever have access to power. People got there because of birth, marriage or conquest; the others were serfs who owned nothing. During the Industrial Age, wealth shifted from land to real estate. Owners of buildings were the new rich. Fertile land lost value and rocky land gained value. Farmers had to go to school and get a job. Access to wealth got possible to entrepreneurs who had ambition and determination.

Today, people who physically work the hardest are paid the least and taed the most.


You do not need to have a crazy idea.

Bill Gates didn’t invent an operating system; he bought it from the computer programmers who invented it and then licensed their product to IBM. Jeff Bezos took Walmart’s idea and put it on the Internet.

Einstein said “Imagination is more important than knowledge”

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