Understanding is an Issue

Many people known to me have read Robert Kiyosaki – largely the concept of Mr. North and Mr. South – famously known as Rich Dad, Poor Dad concept.

There are many things that Kiyosaki says – let us take 2 of them today:

1. No money is made from real estate, equities, commodities….it is made from knowledge about these products. Absolutely no doubting this statement. Surely Knowledge is King – and makes money for you. So it is not uncommon to see people lose money in all these markets as well as see people make tons of money from these markets. So agree with Mr RK fully and completely.

2. Invest for cash flow, not for capital gain: This is a little difficult to understand, and far more difficult to accept. What he means is you should be buying properties for getting rent. In the Indian context, more importantly in the Mumbai context, it is impossible to achieve.

Let us say you buy a property in Worli for Rs. 120 Million (Rupees 12 crores) – you will end up paying about Rs. 12 lakhs PER MONTH as EMI and you will get about Rs. 300,000 as rent. This is a huge NEGATIVE cash flow and a terrible gearing.

Robert says this concept cannot be used in equity shares because when there is a slowdown companies reduce dividends. He forgets tenants re negotiate rents. Recently a friend replaced a tenant at 60% of the previous rent.

What Robert means is ‘Invest for value’ – easier said than done. Over the last 4-6 months I have added a few shares – just because of the good dividend yield. My dad’s portfolio is full of dividend yield shares like Colgate, Cummins, Tata Power, Coromandel Fertiliser, EID Parry, …however many of them BECAME dividend yield scrips only because of a bonus or a split.

At the time of buying these were not screaming buys. So if you accept that all investing is value investing, you are right. However if RK says value investing cannot happen in equities, HE IS WRONG. Also value investing through dividends requires patience. If you cannot see value coming in the form of growth – you would have missed Infosys, Hero HOnda, Bharti, Reliance, …among others. You would have been stuck with Cable Corporation, Scindia steam shipping, etc.

So it is the ability to see value – either in the form of growth, special situation (turnaround, new MD sweeping clean, sale of a division or the purchase of some new lines, etc. which creates wealth.

Let us say VISION creates VALUE. Value can either be cash flow or capital gains.