The other day a friend of mine approached me excitedly, saying, “I
found the house of my dreams. It’s in foreclosure and the bank will sell
it to me for a great price.”
“How good is the price?” I asked.
“Just before the real estate market crashed, the seller was asking
$780,000 for the property. Today, I can buy it from the bank for
$215,000. What do you think?” she asked.
“How would I know?” I replied. “All you’ve given me is the price.”
“Yes!” she squealed. “Now my husband and I can afford it.”
“Only cheap people buy on price,” I replied. “Just because something is cheap doesn’t mean it’s worth the cost.”
I then explained to her one of my most basic money principles: I buy
value. I will pay more for value. If I don’t like the price, I simply
pass. If the seller wants to sell, he will come back with a better
price. I let him tell me what he will accept. I know some people love to
haggle; personally, I don’t. If a person wants to sell, they will sell.
If I feel what I am buying is of value, I’ll pay the price. Value
rather than price has made me rich.
Against my advice, my friend sought financing for her “dream” home.
Fortunately, the bank turned her down. The house was on a busy street
in a deteriorating neighborhood. The high school four blocks away was
one of the most dangerous schools in the city. Her son and daughter
would either have to go to private school or take karate lessons. She is
now looking for a cheaper house to buy and has asked her father, who is
retired, for help with the down payment. If her past is a crystal ball
to her future, she will likely always be cheap and poor, even though she
is a good, kind, educated, hard-working person.
My Point of View
What follows are some thoughts on why my friend will probably never get ahead financially — especially in this market.
1. She and her husband have college degrees but zero financial
education. Even worse, neither plans to attend any investment classes.
Choosing to remain financially uneducated has caused them to miss out on
the greatest bull and bear markets in history. As my rich dad often
said, “What you don’t know keeps you poor.”
2. She is too emotional. In the world of money and investing, you
must learn to control your emotions. When you think about it, three of
our biggest financial decisions in life are made at times of peak
emotional excitement: deciding to get married, buying a home, and having
kids.
My dad often said, “High emotions, low intelligence.” To be rich, you
need to see the good and the bad, the short- and long-term consequences
of your decisions. Obviously, this is easier said than done, but it’s
key to building wealth.
3. She doesn’t know the difference between advice from rich people
and advice from sales people. Most people get their financial advice
from the latter — people who profit even if you lose. One reason why
financial education is so important is because it helps you know the
difference between good and bad advice.
As the current crisis demonstrates, our schools teach very little
about money management. Millions of people are living in fear because
they followed conventional wisdom: Go to school, get a job, work hard,
save money, buy a house, get out of debt, and invest for the long term
in a well-diversified portfolio of mutual funds. Many people who
followed this financial prescription are not sleeping at night. They
need a new plan. Had they sought out a little financial education, they
might not be entangled in this mess.
A Thank You to Jon Stewart
Speaking of finance experts, I personally want to thank Jon Stewart
of ‘The Daily Show’ for taking on Jim Cramer and CNBC. Jon Stewart did
an incredible job of representing the millions of people all over the
world who have lost their savings in the market. He was right in saying
he thought it “disingenuous” to advise people to invest for the long
term through their retirement plans while knowing full well that traders
could steal Americans’ retirement money by trading in and out of the
market. Most traders like Cramer realize that investing in mutual funds
for the long term is financial suicide. Cramer should have spoken up,
but we all know why CNBC won’t let him tell the truth. If he did, the
station’s advertisers would leave.
While I applaud Cramer for going on ‘The Daily Show’ and facing the
music, I’m afraid he was marginalized by Stewart — certainly outgunned —
and he has lost his credibility. He may pay an even bigger price if the
SEC decides to dig deeper.
Jim Cramer is a very smart man. I watch his show. I just do not follow his advice.
In closing, I will say what I have said for years: We need financial
education in our schools. Without it, we cannot tell the good advice
from the bad.
Article by: Robert Kiyosaki.