This question came up in a book I was reading. One of Robert Kiyosaki’s books. You know the guy; author of Rich Dad Poor Dad. I’ve read most of his books. His answer floored me. It wowed me. It gave me one of those “ah-ha” moments.
Do you know the answer? It’s very simple. So simple, I never would have thought of it.
First of all, I was surprised to read that the riskiest part of any investment has nothing to do with the investment. That concept really made my head spin. How can that be? That doesn’t make any sense. I was about to learn something.
So, according to Robert Kiyosaki, here’s the answer:
The riskiest part of any investment is … THE INVESTOR!
Say What?
At first, I had to put the book down and think about it. I’m not sure I agree with this declaration. How can the investor be the riskiest part of any investment? Isn’t it the numbers? Isn’t it the assets in question? Isn’t it the location, building material, price, rent, interest rates and economic climate? Aren’t these more important than the investor?
Robert Kiyosaki went on to explain his rationale and I entered a new thinking dimension. I came to the realization that he’s absolutely right; it is the investor.
I Agree …
I’ll give you my simple explanation of why I agree with Robert. Not, that Robert really cares if I agree or not. But, his assertion could be considered an “opinion” and not a fact. Robert really harps on being able to tell the difference between opinions and facts. If you can’t tell the difference you could be in serious trouble when it comes to making investment decisions. I highly recommend you read his books and get his insights.
Niagara Falls on a tight rope …
Let’s get away from investing for a moment and talk about something different. How about walking across Niagara Falls on a tight rope? Bear with me as I “tie” this into our story (no pun intended!)
Now, if someone with no tight rope walking experience tried to cross, would this be considered risky? Would you bet money on this person making it across without falling? I think most of us would agree; this would be extremely risky. We’d lose our money, and the walker would probably die.
Now, what if we get a professional tight rope walker to make the journey; how risky is it now? Would you bet that this person would make it? Let’s go a step further, let’s say this person walked across the rope every day for a year and made it safely every time. Would you be surprised to hear of another successful crossing on the first day of the next year? Or, would it be a “ho-hum” event by this time? No, big deal. This person is an expert and the crossing is routine. We know it’s going to happen.
So, now the question; what’s the riskiest part of the crossing? Is it the rope? Is it the waterfall? Is it the height? Is it the wind?
No, it’s the person walking. You tell me who’s walking and then I’ll tell you how risky it is.
Does this analogy cross over into investing? I think so. Let me explain.
Let’s start an Investment Company
What if we form an investment company. We decide to invest $100,000 and then start looking for investments. Two of our group members come back with presentations. The first person wants us to invest in what looks like a “no-brainer.” It’s a sure fire, slam dunk, can’t miss, opportunity; guaranteed to double our money in less than a year.
The other person comes back and wants us to invest all the money in a company called Berkshire Hathaway.
We study each proposal and ask questions, probe, get excited, then get depressed, then excited again. The usual round table investment discussion. The first proposal shows tremendous profit potential. And, the second proposal looks very promising as well.
The group really wants to go with the first proposal until someone in the group asks a very pointed question. “Tell me about the person in charge of this investment?”
The presenter starts with a long laundry list of accomplishments. A long laundry list of university degrees. A long laundry list of experience in exotic financial activities. But, more questioning uncovers something unsettling. We find the investor has no experience in this particular investment. In other words, the investor may be an expert basket weaver, but we’re not looking for one right now. We’re looking for someone experienced in this type of investment. He has none.
The risky flags start to go up.
The second presenter tells us about Warren Buffet, the founder and leader of Berkshire Hathaway. We hear about Warren’s investment philosophy. We hear how he only invests in businesses he knows and understands. We hear how he never invests in a company without visiting the premises and doing a complete study of the company balance sheet. If they won’t let him look at the books, he won’t invest. We hear that Warren only invests in companies that show a profit. Sounds simple enough, but you’d be surprised how many investors put their money in companies that are not profitable and have never shown a profit and show no signs of ever showing a profit (I’m not proud to say I’ve done this). For Warren, a company must be profitable right now. And, he won’t invest in a company where future profits cannot be predicted with reasonable accuracy. We hear about the amazing profitability of Berkshire Hathaway; consistent and exceptional profits year in and year out.
Warren is like our professional tight rope walker; the tight rope walker makes the Niagara Falls crossing look easy, Warren makes consistent profit making look easy.
The group decides to put the money in Berkshire Hathaway.
How do you get better; smarter?
What does this all mean? Does it mean, pick the right stocks and/or the right companies? Not to me it doesn’t. What it means to me is I’ve got to get smarter when it comes to investing. The reason I need to get smarter is because – wait for it … – I’m the riskiest part of any of my investments! I’m the investor remember!
I’m the one to blame when it all goes wrong. I’m the one who’s walking the tight rope. If I’m not experienced at tight rope walking then I better not try it until I become good.
Now, it’s just a question of “How do I become good?” Or, “How do I become better?”
There are ways to get the necessary experience without using the trial and error method. I’ve found targeted reading and associating with people who’ve already done what you want to do is a great way to get experience.
That’s why I read a lot about property investment. I want to learn from the pros. I want to know what they’re thinking. I want to know what they’re doing. I want to model their investment behavior.
And, that’s why I’m excited about the Property Investor Ideas Exchange (PIIX) Group. It’s a way for people to rub shoulders and talk to folks that are out there making big things happen in property investment. I love to learn from people that are on the playing field and scoring points.
Who are you listening to?
Who are you listening to? Are you listening to people who are not on the playing field? Are you listening to people who are not scoring runs? Are you listening to people who are not qualified to comment?
I’ve been guilty of all of the above. When I was in the military many years ago, I would ask my buddies in the dormitory for investment advice. They were more than happy to give it to me. I ran with it. Right into a brick wall.
Now comes the acid test question … “What was the riskiest part of my dormitory investment?” Was it my buddies in the dorm? Was it the stocks I invested in? Was it the warm California climate?
Nope. I know the answer and it hurts. The riskiest part of the investment was the investor – me. I had no idea what I was doing.