Selling the sizzle, not the steak

In 1997 Robert Kiyosaki, a former salesman from Hawaii, self-published a book entitled Rich Dad, Poor Dad. It is written in the form of parables, a specific genre in self-help books employed by such runaway successes as Who Moved My Cheese? After gaining popularity in multilevel marketing circles, the book was picked up by a mainstream publisher and went on to be a best-seller, leading to a book series (total sales for the series are claimed to be in excess of 20 million copies), including Why We Want You To Be Rich: Two Men, One Message, a title co-authored with Donald Trump, the lugubrious real estate tycoon. From unpromising beginnings, Kiyosaki became an international celebrity (he was even hyped on Oprah Winfrey’s television show in 2000) with a strong business in motivational seminars. Rich Dad, Poor Dad has become, Time magazine has claimed, ‘the number one personal finance book in the history of the world’.

The central message of Rich Dad, Poor Dad is that if you want to be rich, you should adopt the attitudes of Kiyosaki’s ‘rich dad’, the father of a school friend who had become rich without the benefit of higher education. What you should not do, according to the book, is to imitate the outlook of Kiyosaki’s own father, ‘poor dad’, a respectable school superintendent in Hawaii who is depicted in the book as lacking in entrepreneurial spirit. Instead of working hard and saving, Kiyosaki recommends that you acquire income-producing assets. This boils down mostly to buying rental properties or starting an unspecified business.

I have a sneaking sympathy for some self-help books, but not for this one: in my view it is largely gibberish. Kiyosaki flits distractedly from one topic to the next in a cloud of slogans and clichés. There is little concrete advice, and what there is consists partly of erroneous statements (for example, on the US tax deductibility of certain personal expenses), and unverifiable claims (such as that Kiyosaki has made many millions in a diverse set of businesses), and he even advocates potentially illegal activities such as insider trading (see Chapter 2). Mostly, though, it poses as an inspirational book, clearly aimed at people with low incomes and not much education – hence its repetitive message that you do not need to have a high income or a good education to get rich. This is, of course, true, but not quite in the way that Kiyosaki is insinuating, and certainly not often at a very high speed.

Normally personal finance gurus who aim at this market do not receive much attention in the mainstream media. They may make a comfortable living catering to the aspirations of some vulnerable people, but they have little or no influence on society at large, or on private investors in particular. But this is not to do justice to Kiyosaki: he is ‘huge’. Rich Dad, Poor Dad and two of his other titles managed to reach number one on the best-seller lists of the Wall Street Journal and the New York Times, as well as in other countries around the world. He is a financial columnist and ‘expert’ on Yahoo finance. He has appeared many times on television, and his book has been endorsed by film stars such as Will Smith. And there is his association with the real estate tycoon Donald Trump, with whom he has co-authored the book Why We Want You To Be Rich.

Robert Kiyosaki matters because Robert Kiyosaki is famous, and famous people have influence. Although he claims to be committed to financial education, his books contain little useful financial education and much that is inadequate or misleading. There is nothing wrong in principle with, for instance, advocating entrepreneurship, or with suggesting that money can be made in property, but Kiyosaki does not provide adequate guidance on how to deal with the nitty gritty in these fields; his books are ‘inspirational’ and general, rather than practical and specific.

Investigations into Kiyosaki’s background have revealed connections between the financial guru and a number of cult-like multilevel marketing organisations and self-help organisations. For a start, Kiyosaki agrees that in 1974 he underwent training at EST that, he says, was life-changing. EST, short for Erhard Seminars Training, was a New Age seminar organisation in the 1970s and 1980s that became controversial because of its confrontational methods. Its founder, Werner Erhard, told a Financial Times reporter in 2012 that ‘I’m not nice. I don’t say nice things. I don’t like nice people ... I find being nice is committed to me, not to you’, which gives a flavour of the kind of material dished out at these seminars. In the 1980s Kiyosaki joined a programme called ‘Money and You’ that had been established by another EST alumnus, Marshall Thurber. In 1984 Kiyosaki and others took the programme to Australia, running it successfully for nearly a decade. Then, in 1993, an Australian news show Four Corners ran a critical piece on ‘Money and You’ that included interviews with people who had attended the seminars. According to one attendee, ‘we got to a stage where virtually everybody in the hall at one stage was crying ... Some of them were on the verge of a nervous breakdown ... You start losing sight of your own values and your own convictions.’ This is reminiscent of descriptions of the EST weekends that were held back in the 1970s. The Four Corners report was apparently damaging to ‘Money and You’ in Australia, and in the following year Kiyosaki left the organisation for unrelated reasons, according to him.

Kiyosaki has also had a relationship with Amway, a direct selling organisation that uses multilevel marketing (MLM) techniques to purvey beauty, health and cleaning products around the world. MLM, which has been heavily criticised, rewards its salespeople not only for the products they manage to sell, but also for the new salespeople they recruit. Although the MLM company itself and the more successful salespeople may make money in MLM, many other sale recruits may not, often being required to pay in substantial funds to obtain their stock and get started. According to a 2011 report, active Amway distributors were earning only $115 a month on average. David Bromley, a sociologist of religion, describes Amway as a ‘quasi-religious corporation’ in which successful Amway distributors can ‘receive lucrative fees for speaking at Amway seminars and rallies’. In the US, participants at Amway meetings are often presented with a strong message that Americans have lost touch with the personal qualities which allegedly made America great, and by selling Amway products they can become successful self-employed businesspeople. Bromley compares the meetings with the old-fashioned religious revival meetings, with individuals shouting out affirmations such as ‘I believe!’ and ‘How sweet it is!’ during speeches and award presentations. Politically, Amway seems to be very conservative, which appears to reflect the beliefs of the types of people who want to become distributors. A very powerful element in Amway’s appeal is that, like a cult, it provides a kind of ersatz family, a group structure that provides much emotional support to its members.

So how close is Kiyosaki’s connection with Amway? It is claimed that an Amway executive found a copy of the original self-published version of Rich Dad, Poor Dad and adopted it as an aid to enthusiasm for Amway distributors, giving the book the boost it needed to be adopted by a mainstream publisher, as mentioned above. It is further claimed that Kiyosaki was at one time an Amway distributor, although he appears not to have made any public statements on this matter. It is certainly the case that Amway participants have used Kiyosaki’s material to support Amway’s advocacy of being your own boss, and Kiyosaki himself has endorsed network marketing (a type of MLM) in his book The Business of the 21st Century.

Americans, we are told, are used to being sold at, and are fairly immune to the hard sell, although to judge by his book sales, they are not all immune to Kiyosaki. Kiyosaki-related products and seminars are being sold around the world, reaching people in developing countries who do not really understand how the modern, Western-style world works: everything Western looks shiny and wonderful to them, which is distressing to those of us who know better.

While writing this section I was startled to hear from an affluent Chinese Singaporean friend that she had recently attended a Kiyosaki talk in Singapore. Singapore is not a developing country – in many ways it is one of the most advanced countries in the world – but beneath its modern surface lurk cultural attitudes that, to Western eyes, seem curiously credulous. My friend, who should know better, really could not tell the difference between Kiyosaki’s discourse and that of a credible investor with a proven track record like Jim Rogers, an erstwhile partner of George Soros who now lives in Singapore. My friend also tends to commit the other investment sins discussed below, which reminds me that it is not only the poor and the vulnerable who are liable to make such mistakes. The point here is really that ‘inspiration’ from a guru is no substitute for genuine financial education, which takes years to acquire; if you are starting out as an investor and don’t know much, read as many financial books as you can, as well as the high-end financial press, and don’t rely on any single person (present author included) to tell you how things ‘really’ are.

Gold bugs: waiting for Armageddon

There are people on this earth who believe that certain metals, usually gold, are a better long- term store of value than anything else. They are entitled to their opinion, but they do not hold this view in the same way that someone else might believe, say, that residential property in the UK has been a good investment during the last 50 years. They believe it with a fiery, dogmatic passion that is almost mystical. They despise ‘fiat’ money (money created by governments that is not fixed in value). They refuse to consider all aspects of the problem; non-gold bugs are regarded as wilfully ignorant at best, and as running dogs of a conspiracy of the rich, at worst. They trash any dissident view, even if it is expressed by a Nobel Prize winning economist, like Paul Krugman, or a well-regarded top investor like Warren Buffett.

In his shareholders letter of 2011, Buffett makes the important point that gold is a type of asset which never produces a return, and argues people only buy it in the hope the price will go up (this isn’t always true, since some eccentric people appear to buy gold with the sole expectation it will be the only store of value when the imminent collapse of modern society finally occurs). He accepts the gold bugs’ contention that we cannot trust governments to prevent the gradual dilution of the value of fiat money through inflation, but he does not believe we should therefore put all our money in gold. According to Buffett, the world’s extracted gold store currently totals approximately 170,000 metric tonnes, which would form a cube with sides of 68 feet and be worth, at the market price in 2011, $9.6 trillion. He then compares this gigantic gold cube with other investments you could purchase for $9.6 trillion. This second collection could include all US cropland (400 million acres producing $200 billion a year) plus 16 companies of the size of the world’s most profitable firm, Exxon Mobil, which generates $40 billion a year, and you would still have $1 trillion left over. On this analysis, no investor with $9.6 trillion would put it all in gold, which produces nothing, when he or she could invest it productively in assets that could produce $840 billion each year and still be valuable saleable assets in the future.

These are strong arguments to a reasonable person, but they leave the more extreme gold bugs unmoved. Their main problem is fear: fear that an irresponsible government will lead the country into hyperinflation; and a fear civilisation will collapse. In such a scenario, they argue, gold will be the only thing between you and penury. This seems rather unlikely for a number of reasons, not least that the authorities can be expected to try to take all your gold from you in such a scenario. Also, in the event of a collapse so apocalyptic that there is a total breakdown in law and order, how exactly do you think you are going to protect your gold from bandits, even if you are a survivalist lunatic with a bunker and some guns? To see why holding gold is not necessarily a good hedge against social chaos, let’s consider very briefly two real-life scenarios: the exodus of the Vietnamese boat people after the end of the Vietnam War, and the hyperinflation in Germany during the early 1920s.

After the fall of Saigon to the North Vietnamese in 1975, large numbers of Vietnamese sought to escape persecution by taking boats and putting out to sea in the hope of reaching a safe haven. It is estimated that between 200,000 and 400,000 people died at sea, through accidents and piracy. Some individuals had bought their way on to these boats with exorbitant amounts of gold. Then, in 1979, following harassment and expropriations, the Vietnamese authorities agreed to permit ethnic Chinese to leave the country if they wanted. To obtain a permit, you had to pay several ounces of gold, per person, to the Public Security Bureau. It is estimated that $115 million (2.5% of the country’s GNP) was extracted in this way. The lesson? Having some gold might just save your life in an escape, but you might have trouble taking a lot of it with you, owing to its weight and the danger of robbery and expropriation.

The well-known Weimar hyperinflation occurred during a two-and-a-half-year period in Germany between June 1921 and January 1924. The catalyst was the requirement that Germany pay war reparations in gold or foreign currency to the victorious powers in the Great War; Germany had to purchase large amounts of foreign currency, which had the effect of causing the German mark to fall in value rapidly, raising prices dramatically at home. The effects of the hyperinflation were felt differently by different socio-economic classes: for example, initially workers were paid more frequently, with larger and larger sums of paper money, and were still able to obtain food; the middle classes, relying on savings, suffered dramatic drops in the value of their assets and were quickly reduced to penury, especially if they sold their houses to raise cash. People who had borrowed large sums earlier, on the other hand, did well, since they could repay their debts easily in devalued marks. One of the most unpleasant effects of the inflation was that, although there was plenty of food available in the countryside, farmers refused to sell it for marks and towns and cities were starved of food. Even if you had some gold or foreign currency, it was hard to get food in the towns; in Breslau, for instance, one foreigner found that he could only obtain ‘one square meal a day by crowding into a restaurant in the early morning and waiting until luncheon was served some hours later’. Malnutrition was particularly severe among children. Inevitably, by autumn 1923 the government had given itself powers to seize foreign currency, gold and other precious metals, and to open post and break into people’s houses to find them. In Berlin there were police raids on cafés during which café customers were forced to hand over any foreign currency in their wallets.

Having some gold – a gold chain, say, or some gold coins – might have helped you to obtain essentials, but in Germany other valuables such as grand pianos, good paintings, and even cigars were also used. In neither Germany nor Vietnam did gold provide complete safety. Thus the belief that holding all your assets in gold will protect you in dire circumstances is probably an illusion.

So does this mean that investors should hold no gold? Perhaps not; some experts recommend holding a small proportion, say 5%, of your financial assets in gold. Taking transaction costs into consideration, the cheapest way to do this is to hold bullion in a specialist gold vault, if you can afford it, but this is unlikely to be a good solution to the problem of how to pay for things if cash won’t buy them – you may not be able to physically take possession of your bullion in a major crisis, and even if you can, shaving bits of gold off your gold bars to buy things may attract some very unwelcome attention. This is not a book on how to survive a violent social collapse, but wise investors should give some thought to how they can plan for such an undesirable event. Experience suggests that a spread of assets, some easily moveable and tradeable, like jewellery, and some not, like buildings and land, may help, but they will not on their own provide a guarantee of anything – but neither will holing up in a cellar with an assault weapon and a pile of gold. If the apocalypse ever occurs, all bets will be off.

The money illusion

In 1922 the celebrated American economist Irving Fisher went to Germany to investigate attitudes among Germans during the hyperinflation. One woman he spoke to, a Berlin shopkeeper, sold him a shirt. ‘Fearing to be thought a profiteer, she said: “That shirt I sold you will cost me just as much to replace as I am charging you.” Before I could ask her why, then, she sold it at so low a price, she continued: “But I have made a profit on that shirt because I bought it for less.”’ According to Fisher, the woman was wrong: she had in fact made a loss in real terms. The sum he paid for the shirt, 150 marks, was, according to his calculations, only worth 90 1921 marks (he doesn’t say exactly when in 1921), and since the cost price to the woman had been 100 1921 marks, she had lost the equivalent of 10 1921 marks. This, says Fisher, was the result of the ‘money illusion’, the inability to distinguish clearly between the nominal value of currency and its ‘real’, or inflation-adjusted, value. Fisher believed that the money illusion occurs because people tend to think of their own currency as fixed in value and of all other things as fluctuating in price.

There is clearly something in this idea, although it remains a topic of vigorous debate among academic economists.

On the most basic level, it is the case that many people, even if they are vaguely aware of the effects of inflation, aren’t very good at calculating inflation adjustments, or, indeed, at spotting when nominal and real figures are being confused. For example, politicians and journalists frequently commit these errors, while financial services firms are not above quoting rates of return in nominal terms without mentioning the fact unless regulations prevent them from doing so. Consider the following statement from the UK Prime Minister David Cameron in a 2010 speech: ‘And here I want to say something to the people who got us into this mess. The ones who racked up more debt in 13 years than previous governments did in three centuries. Yes you, Labour.’ While it may be true that the Labour Party did not manage the economy very well during those 13 years, Cameron’s statement was deeply misleading because he was talking about a nominal increase in debt; if all the figures were expressed in inflation-adjusted terms, Labour’s debt would look considerably smaller when compared with the three centuries of debt to which Cameron referred.

In the housing market, the money illusion seems to have a bearing on price bubbles. Suppose a young couple is trying to decide whether to buy or rent. They can obtain a permanently fixed-rate mortgage. They assume that real and nominal interest rates move in tandem (they don’t). If inflation is decreasing, they may think that buying a house is cheaper than renting, failing to take into account that decreasing inflation will increase the cost of future mortgage payments in real terms. If they, and many like them, decide to buy, house prices will be forced upwards. Furthermore, nominal house prices are ‘sticky’ in a market downturn. People don’t want to sell their houses for less than what they paid for them in nominal terms, even if they could purchase another house more cheaply than they could have done earlier. If someone purchases a flat for, say, £100,000 and prices drop by 5%, the tendency is to hold out for the nominal purchase price even if they can now buy a similar flat for £95,000. This tendency has the effect of drastically reducing the volume of transactions, making the market stagnate.

Much depends upon the presentation, or ‘framing’, of an issue. For instance, there is experimental evidence that when offered a choice between a 2% wage increase at a time of 4% inflation and a 2% wage cut at a time of 0% inflation, people will tend to prefer the former, even though there is no difference in the loss in real terms. A nominal increase just seems to be better. If the question is framed in a different way that emphasises the effects in real terms, more people will see that there is no difference between the two in real terms.

Going back to the Berlin woman who sold Irving Fisher a shirt in 1922, it is noticeable that she was eager to emphasise the cost price of shirts had now risen to the retail price she was asking – in other words, the replacement cost of her stock had risen. This highlights the phenomenon that shoppers generally regard shopkeepers who sell old stock at new, higher prices during inflationary periods as acting unfairly. The Berlin shopkeeper was concerned that the shopper might perceive her higher nominal profit as a form of gouging. In fact, Fisher argued, she was unaware she was making a loss in real terms, but even if she had been aware of this she might still have been sensitive to shoppers’ money illusion that she was making too large a profit.

Most economic transactions are expressed in nominal terms because it is easy, and in the short term the calculations may not diverge much from the real figures. Most of us can’t easily adjust for inflation every time we buy or sell something, and nor do we need to. But for any important investment decision we should certainly do our inflation sums, usually by using price indices. A clear explanation of how to do this is available in a ‘Statistical Literacy Guide’ published by the House of Commons (available at: www.parliament.uk/briefing-papers/SN04944).

You can fool some of the people all of the time …

Back in the 1970s, personal growth cults were all the rage among the young, partly in response to the excesses and drug abuse of the hippy era of the 1960s. In the 1970s, there was a marked move away from hedonism to focus on ‘alternative’ lifestyles that were more constructive. Cults and communes of various kinds offered ways of living that, while completely different from Western norms, seemed to promise a cleaner, better existence. They were not all bad; many cultish ideas from the 1970s, such as the value of organic foods, the toleration of diversity, and the importance of environmentalism have now become thoroughly mainstream and are often endorsed by major political parties. The more religiose cults, such as the Hare Krishna movement (the International Society for Krishna Consciousness), who have been described as the Jehovah’s Witnesses of Hinduism, helped many addicts to recover from drug addiction through a spartan regime of work, sparse diet and singing. Some cults had a decidedly Western persona, using a Western psychological framework to teach techniques that were supposed to make you, the individual, a more effective, powerful and persuasive person in normal life – and many people who spent time with these groups have gone on to become successful in business, notably in the sales arena, where personal communication and persuasion skills are so important. Being communicative and persuasive, however, does not necessarily make you someone who has the analytical and reasoning ability to develop sound judgement in investment, and current investors need to be aware that there are quite a number of individuals and organisations operating today in the personal finance arena who have a background in the cults of the 1970s, and still use their techniques. Approach them with caution!

Periodically we hear respectable economists arguing for a return to the gold standard, the heyday of which was between 1870 and the outbreak of the First World War. During that period many of the more developed countries issued paper money which had a fixed value in terms of gold, and was often freely convertible to gold. The debate is complex and highly controversial, and ultimately not much use to the private investor who has to get along in the world today, where governments issue fiat money that is not tied to gold. Personally I am persuaded by those who argue that reintroducing a gold standard would not solve anything much, and would certainly not prevent governments from finding ways to manipulate the value of money. Fiat money is a problem for investors because it reduces in value over time, so we have to invest in productive assets like businesses and buildings, rather than living off the interest from our government bonds, like the Victorian family described in Galsworthy’s famous series of novels, The Forsyte Saga. So, beware of gold bugs and the promoters of gold as an investment; they are unlikely to lead you to a way of making a good return.

Lastly, we need to train ourselves to think always in terms of real (inflation-adjusted) returns, not nominal returns, especially over the long term. If you do this, you will rapidly realise that cash deposits and bond yields often generate negative returns in real terms, and you will be less impressed by the massive nominal profit you just made by selling your house. Adjusting for inflation helps you to tell friend from foe, too; people who always quote nominal figures at you in investment either don’t know what they are doing or are deliberately attempting to mislead. We need to develop a sense of what is really valuable, and what is an increase in value, regardless of nominal prices. There is a lot to be said, too, for keeping it simple. Warren Buffett tells a story of an old man who had started out as an itinerant peddler and had built up a successful department store. When his son came to him with big plans for a financial shake-up of the business, the old man told him to go and look in a storeroom on the seventh floor. ‘You’ll find the old cart I pushed here when I came to this town forty years ago,’ he said. ‘Mark that down as capital. Everything else is profit!’