This is the third article on how to interpret Robert Kiyosaki. This point about how to invest according to Kiyosaki is probably the most ambiguous and confusing one, because the way to invest in markets has to change depending on the market. First of all, I should also point out that Robert doesn’t only talk about investing in stocks. He loved businesses that work without you having to be there.
The point about Robert Kiyosaki’s way of investing that has probably drawn the most attention is the one where he says something like “diversification is not good. Someone who diversifies doesn’t know about investing.” This point is neither true nor false. Let us explain.
First of all, we need to explain what, in my view, diversifying your investments means. To me, diversification means choosing different investment vehicles and putting part of your capital in fixed income and part in equities. That way, if the market goes to pieces, you may lose the equity investment but keep the fixed income, or simply two different vehicles, such as the stock market and currencies.
When Robert said that diversifying wasn’t good, I imagine he meant that when you decide to invest in the stock market, you need to analyze and choose one stock, not ten, because it would be very unusual to make gains on all ten, so with some of your investments you’d be betting against yourself.
Diversification, as I understand it, is good. Even so, the supposed “diversification to avoid” that Kiyosaki describes is also right. I’ll say it again: you have to read Robert between the lines, because his teachings and advice have to be adapted to the market of the day.
Investing for the short or the long term?
Every long-term investment is a short-term investment that didn’t turn out as you expected. Let me explain. When I invest in a stock, I always hope it will give me a 15% return tomorrow. If it did, I’d sell those shares at tomorrow’s market close with that return. If it doesn’t, I’ll have no choice but to hold the investment until I get a return I’m happy with.
Above all, Kiyosaki favored shares in companies that paid good dividends. That way you’d have an asset and an income stream from that investment.
So whatever anyone tells you, every investor is really after the short term, because human beings want results today, not tomorrow.
To shed more light on this point, though, let’s turn to the investor Warren Buffett, who gives us wise and useful advice that we should always apply when it comes to investing in the stock market:
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
What this quote means is that you should:
- Invest money you don’t need. That way you can wait for the market to give you a return over time, and you won’t have to sell at a loss because you need your money back to make a payment.
- If you’ve invested in a stock that you don’t expect to rise in value over the next few years, why on earth are you investing in it? Get out quickly, or simply don’t get in, and choose another stock.
That’s as far as the stock market goes, although I’ll say again that when we talk about investing, besides other investment vehicles there’s also the option of investing in a business.
You can buy a business whose owners didn’t know how to make the most of it, build value into it and speculate with it as you would with a property or a stock. Every business and investment is based on speculation, and all speculation looks for the short term, even if that isn’t always possible. That’s why, for any risky investment, you should be prepared and, as far as possible, keep capital reserves so that the result of your investment doesn’t hurt you.
Another point Robert Kiyosaki talked about is accepting that sooner or later you’ll have to take losses on some trade, so the sooner that happens, the sooner you’ll learn from the mistake and grow as an investor. And it’s because of this point that you could say… diversification is good, but even diversifying is something you have to know how to do.
As I said in the first article, I haven’t read all of Robert Kiyosaki’s books, and I read the ones I did a long time ago, so I’m open to comments and questions that refresh my memory.
Featured image: United Soybean Board, CC BY 2.0, via Flickr.
