In continuation of the lessons I’ve learned from Rich Dad Poor Dad author, Robert Kiyosaki, I will discuss today what he called “Types of Investors.”
According to him, there are two main types of investors: Average Investors and Professional Investors.
Average investors buy packaged securities such as mutual funds, treasury bills, or real-estate-investment trusts.
Professional investors are more aggressive—they create investment opportunities or get in on the ground floor of new offerings, build businesses and marketing networks, assemble groups of financiers to fund deals too large for them to undertake alone, and pick the companies with the most promise for initial public offerings of stock.
There are five different types of professional investors:
The Accredited Investor. As defined by Robert Kiyosaki, accredited investors are individual investor that earns at least $200,000 in annual income ($300,000 for a couple) and/or has a net worth of $1 million. An accredited investor has access to many lucrative investments that, because of their risk may be legally off-limits to people of lesser income. Although usually financially educated, accredited investors are not necessarily fully literate. They may be content with security and comfort rather than wealth, and may rely on advisors to develop and implement their financial plans.
The Qualified Investor. This investor is well versed in either fundamental or technical investing and so there are two types of qualified investors – the fundamental investor and technical investor.
Fundamental investing requires the ability to assess a company’s potential by reviewing financial statements, tracking the industry the company represents, and calculating how changes in interest rates and the economy as a whole could affect profitability. The fundamental investor uses financial ratios, which you’ll learn all about later, to assess the strength of a company he or she is considering as an investment.
Technical investing is different—it is based on knowledge of the sales history of a company’s stock, the mood of the market in general, and techniques such as short selling and options. The fundamental investor is typically an S in the CASHFLOW Quadrant because he or she will usually operate alone in evaluating stocks, either through examining fundamentals or using technical analysis in evaluating potential investments.
Unlike a fundamental investor, a technical investor (often a stock trader) does not necessarily look for well-run, profitable corporations. If people are rushing to invest in a certain type of industry, say dot-com companies, the technical investor may jump on the bandwagon, regardless of whether these companies are showing earnings, let alone profits. Technical investing is thus more speculative than fundamental, but it can yield greater rewards. Regardless of investment style, qualified investors know how to make, or at least preserve, money in an up or down market.
The Sophisticated Investor. The goal of this investor is to build wealth by developing a foundation of assets that can generate high cash returns with minimum payment of taxes. Armed with the three Es—education, experience, and excess cash—the sophisticated investor takes advantage of tax, corporate, and securities laws to protect capital and maximize earnings. When operating from the B quadrant, the investor can choose the best structure or entity through which to create assets. This entity provides some degree of control over the investment and also serves as a firewall between personal and business finances in the event of a lawsuit.
Sophisticated investors exercise control over the timing of taxes and the character of their income. They know, for example, to defer paying taxes on capital gains from real estate by rolling over profits to more expensive property. They look at economic downturn as an opportunity to pay bargain basement prices for quality securities, and they create deals instead of simply waiting for the right one to come along.
Sophisticated investors take risks but abhor gambling, hate losing but are not afraid to, are financially intelligent yet rely on experts to teach them more, own little in their names yet command great wealth. Although they become partners in real-estate ventures and large shareholders in corporations, they lack one essential strength: management control over their assets.
The Inside Investor. Building or owning a profitable business is the primary goal of this investor. Whether as an officer of a corporation or owner of a majority of its shares of stock, the inside investor exercises some degree of management control. By running business systems from the inside, he or she learns how to analyze them from the outside and thereby becomes a sophisticated investor as well. Although inside investors have financial intelligence, they do not necessarily have financial resources and thus may not meet the definition of an accredited investor. If inside investors mind their own business and succeed, however, they can become not only accredited investors but ultimate investors as well.
The Ultimate Investor. The goal of the ultimate investor is to own a business that is so successful that shares are sold to the public. Making an initial public offering (IPO) is expensive and full of risks, yet it allows business owners to cash in on the equity they have built up in the company, while also raising money to pay down debt and fund expansions. The ultimate investor is one who has mastered every rule and enjoys playing the game for its own sake.
Which type of investor do you belong? As for me, I am not even a professional investor. I am just an average investor. But with the continuous learnings that I feed my mind, I hope to become a professional investor someday and be able to reach the ‘ultimate investor’ status.
As an ending, I will leave you with another Rich Dad Tip:
“Financial intelligence is the ability to convert cash or labor into assets that provide cash flow.”