Analysis of Beating the Street and Rich Dad, Poor Dad

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Analysis of Beating the Street and Rich Dad, Poor Dad

Peter Lynch’s Beating the Street

Summary of the Book

To every sane individual, the family is the most important part of their life. Unfortunately, many professionals are often too engrossed in growing own careers but at the expense of own families. In the book, Lynch acknowledges that he did not spend as much quality time as is desirable but is working on it after retirement (12). He uses the analogy of seventh grade students to underscore that anyone can make it big in financial investments but the key is keeping it simple by investing in companies that one understands how they work (Lynch 25). In the second chapter, the book cautions readers against listening too keenly on market analysts who are always pessimistic. He acknowledges that, “Even after good news is made public, Wall Street can be slow to react” (Lynch 252). Financial markets suffer crashes when stocks are valued too high but understanding the dynamics of a specific set of firms can present the perfect opportunity for an investor to buy even when it appears as the best moment to sell.    

            There are some financial investment options that seem popular with many American investors. Lynch cautions against following such trails by pointing out that bond funds do not offer as much returns as some readily available direct investment tools such as stocks (46-47). He points out that, “The reason that stocks do better than bonds is not hard to fathom” (Lynch 42). These ensure a definite ROI and do not require one to research or manage to profit from them. There are many mutual funds in operations across the U.S. though, many of them are duds. Lynch points out that getting a good mutual fund demands as much research as that which is necessary to ascertain a good stock option (51). However, finding a good firm is not always hard as admirable management operations are thrifty and are careful not to use resources in conducting glamorous campaigns. This implies that while stocks are better than bond funds, a knowledgeable investor will opt for shares as opposed to bonds.

            Big firms were once small companies. Lynch advises readers to focus more on understanding the opportunities presented to small companies in future as they avail massive avenues for high returns as opposed to large firms with very limited chances for expansion (70). It is common for investors to lose money in stocks. The key to good gains is to study fundamentals when the situation seems to deteriorate, it is ill advised to hold or otherwise buy its shares while performance is on the decline. Lynch points out why he preferred investing in cyclical organizations (70). These are entities whose performance is closed dependent on the manner a nation’s economy performs. When there are good times, they perform exceptionally well but in times of recession, their profit margins are hit hard. Investing in such firms in times of economic uncertainty often resulted in Lynch making huge earnings from investing in them.

Utility firms which are not doing so well are also a great investment opportunity for the individual investor. Even in tumultuous times the government will bail out such firms and their importance to an economy implies that at some time, it will often rise again ensuring huge returns for once low buys (Lynch 90). There are times when publicly owned firms are privatized. The initial stock offering is nearly always presented at below book value making them very worthy buys. New fast food firms are always good buys as they have the capacity to expand greatly in a very short while (Lynch 70). It is prudent for every investor to reassess own portfolio every half year to determine the performance of each firm invested in. this enables the investor decide whether to buy more of a given stock or dispose of it in to improve their financial position.

Analysis of Lynch’s Book

            It is imperative to note that Beating the Street remains a very applicable piece of literature with great educational benefits to readers regardless of personal acumen in financial investments. It is simply written and veils the massive complexities potential investor often associate with the field. The principles Lynch claims to have employed over the years working with Magellan Fund are straightforward and the analysis is objective in nature. Lynch’s book is full of ideas on the best investment frameworks. With all the principles aligned with the experiences Lynch encountered, the book is highly useful to investors or those who would want to understand the dynamics of the market. Reading the book, one is overwhelmed with the body of knowledge developed and conceptualized. To ease the process of investing for people, Lynch has filtered firms into slow growers, cyclicals, asset opportunities, fast growers, non-growers, and stalwarts. The filtration helps the reader to comprehend the nature and growth magnitude of the organizations. Moreover, Lynch has developed numerous helpful principles for investors such as investing in shares rather than bonds, venturing in solid stocks, looking at stocks for their value, and investing in areas where one has already ventured into.

From the ideas extrapolated in the book, Peter Lynch believes that investors have more freedom to act autonomously as well as study the market. The flexibility that individual investors act with gives them a competitive edge to research markets extensively; thus, manage to discover profitable ventures. The book contends that investors should apply local knowledge to dig possible venture options and then getting familiar with the market dynamics. In illustrating how to apply local knowledge, Lynch asserts, “It’s perilous to invest in a cyclical without having a working knowledge of the industry” (185). Consequently, the most significant and timeless principle developed by Lynch is to venture into the known. A person who invests in a firm they know well will likely have higher growth prospects than a fund manager or a person without that local knowledge. In this regard, the book is helpful in understanding where to invest, the appropriate time, and the processes to undertake.

            National economies are presently more interlinked to the global markets as was the case during Lynch’s tenure at Magellan Fund. However, the reactions of the stock markets in response to times of economic upheavals remain the same. This implies that the content contained in the book remains relevant today. Lynch takes an honest approach into explaining why people should not consider investing in financial markets as easy as opting for stock markets (Lynch 70). Over the course of 13 years with the successful fund, Lynch amassed great skill and expertise in understanding what made him successful from the times of loss in his early years through to his time of departure (Lynch 12). For a keen investor, it is evident that each chapter avails timeless advice on specific subject areas. The book’s main theme revolves about Lynch’s dedicated commitment towards dissecting common stock securities for careful analysis; thus, informing him which organizations are sound enough to invest in (Lynch 14). This implies that Lynch only opted to invest in firms of which he had a solid understanding that they are operating a solid business. For instance, he noted that “The $31 million that pier 1 received for selling half of sunbelt was $6 million more than it had paid to acquire all of sunbelt in 1990” (Lynch 133). To reach such a decision, Lynch notes that he was not only concerned in the internal affairs of an entity but also how it positioned itself in the external environment awash with numerous and significant dynamics (14). More importantly, the book champions for investors to diversify investments as opposed on a particular form of financial instrument.

            Upon analysis of this book, it is clear that investors are encouraged to be meticulous in the manner they select stocks to invest in. Lynch proposes a bottom up tactic where a particular prospect is picked out and keenly assessed. Lynch supports a straightforward way of doing this which entails employing personal experiences such as how a consumer demographic is reacting to its products (20). Understanding more about the company’s organizational structure, its strategies, and attitudes on operational costs allows an individual investor to estimate its trajectory for future profitability and growth. For instance, Lynch notes that a firm can express its quest for improved earnings by raising commodity prices, cutting production costs, expanding into novel markets, focusing on old markets, or selling off, closing, or revamping loss-making divisions.

            In most developed economies today, it is evident that small companies, especially start-up business with radically innovative ideas, products, and services exhibit phenomenal growth trends as opposed to large firms that have been around for a long time. Lynch provides that the investments he made from purchasing stocks in smaller companies that became big after a while brought him memorable profits (70). Fast growers, asset opportunities, cyclicals, and turnarounds are some of the firms Lynch encourages investors to select for consideration prior to purchasing stocks. However, Lynch notes that it is critical for one to gather vital information about their strategic variety as each tends to react differently given the dynamics prevailing in the external environment (132-133). Investors are encouraged to avoid stocks of stalwarts and slowly growing enterprises.

            There are numerous ways to attain data on the true value of a company’s stock. Upon analyzing Lynch’s work, it is clear to see that a criterion for selecting which stocks to purchase is a must for every keen investor. Lynch encourages people to consider organizations in terms of financial performance which is easily obtainable through different media. For instance, firms are obligated to publish financial reports in which one can assess year on year earnings and growth in revenues (31). The price earnings ratio is an important instrument which enables the investor to determine whether stock illustrate an entity’s true value relative to its performance in the internal and external settings. Others include net cash per share, dividend and payout ratios, debt to equity ratios, and inventories. Based on the information provided throughout the book, people should at least read to understand the dynamics that shape investments.

Assessing the Rich Dad, Poor Dad

Summary of Kiyosaki’s Book

            Young people from wealthy families learn by example from their parents on how to make money rather than spend it while middle class families often only believe that education is the key to riches. The poor lack in both areas and commonly tell their kids, “Stay in school and study hard” (Kiyosaki 2). Rich Dad, Poor Dad is an iconic book which has to date offered valuable insights to its readers especially finance students with valuable ideals of how to ensure healthy personal finances.  

            In the book, Kiyosaki names his poor dad as a man who excelled exceptionally well in his educational endeavors (9). In contrast to widespread public perception, his rich dad did not do well in school in relation to the other one yet he became immensely prosperous. Kiyosaki’s writings are established on the financial principles learned from the rich father in the light of failures and mistakes witnessed in the poor dad (Kiyosaki 11). The rich dad happened to be Kiyosaki’s biological father’s best friend. As Kiyosaki grew up, he got to learn from the rich father the importance of running multiple businesses, managing employees, and investing in real estate towards increasing his sources of passive income. Kiyosaki desired the knowledge his rich father possessed and he was taught in the best possible way, practically (12-13). Through a succession of lessons coupled with jobs that availed rich experiences, the mentored one came to the understanding that rich people earn money in a way that was profoundly different from how poor people treated money.

            There is a general misconception among many people that one can only make money through earning a huge income. The book rubbishes this concept by providing that it is because of the wrong mindset that most individual have a problem overcoming (Kiyosaki 14). Out of fear and greed, persons bent on making money from earning a salary tend to suffer poverty out of ignorance by making comments like “I'm not interested in money, or Money doesn't matter” (Kiyosaki 5). The poor tend to be comfortable gaining a paycheck and paying up for expenses without questioning the status quo. Conversely, the rich take risks whereby they bravely invest incomes on opportunities that ensure financial freedom in the long term.

            Financial literacy is the foundation of financial freedom. Kiyosaki learned that the rich dad understands the significance of building an asset base while avoiding runway liabilities (46). Kiyosaki points out that the game of monopoly is a great starting point to grasp the realities of how to make wealth in a way that money works to make more money. Fourth, Kiyosaki noted that rather than spend money, the rich are more concerned with using much of their time seeking ways to make more money through informed investments (57). Besides, the rich often seek way to invent or create new sources of money (Kiyosaki 70). They generate ideas that evolve into business which employ people who in this case are the poor and have to commit time as well as resources in exchange for a salary. Therefore, the wealthy are persons who are investors and run businesses. Lastly, Kiyosaki deduces that the rich are committed to continuously learning which enables them to pinpoint opportunities for growing the money they have already made. On the contrary, the poor have to approach the rich in order to gain money in the form of remunerations. The way the two groups are very different as the rich do not work to make money but rather endear to learn how to make money. However, the book provides that the poor can seek to be frugal and save enough money to venture into means for investing in return for a passive income.

Analysis of Kiyosaki’s Book

The book is an inspirational to many people but it is an individual finance assessment told from a framework of a parable. Kiyosaki provides a complete reconsidering of the workings of money. In this regard, the book does not refer to an asset as a valuable thing but rather as something that creates cash flow. This thinking shows that one cannot regard some possessions such as a home as an asset as they do not merely generate cash flow. Secondly, the advice given throughout the book is helpful but it is a self-help structure meaning the ideas might not necessarily work. In fact, the ideas presented are not applicable mindsets but rather are lessons positioned as counterintuitive disclosures. Moreover, Kiyosaki has presented some lessons in a myth-like presentation through an individual success story. Kiyosaki has draped the story in the cloak of education illustrating meaning most of the ideas sound promising only on paper. Kiyosaki asserts that people should buy assets that generate cash flow to finance other purchases (62). Thus, the revolving idea is to acquire income-generating assets but doing so today involves a lot of speculation. Kiyosaki provides a significant logic that a people will never learn money-management techniques in school. However, he advises people to enroll in programs offered by Rich Dad Company to access financial quadrants.

Kiyosaki has developed numerous principles in the book such as rich people work to learn things that they can apply to make money and assets should generate income while a liability is something with costs. Furthermore, Kiyosaki tells people to mind their business, dodge taxes, and invent money. However, the principle on dodging taxes is out rightly wrong since all the ideas offered relate to delaying or minimizing taxation. However, for an objective reader, Kiyosaki’s book is a very insightful piece of literature. It offers a great starting point for persons keen on understanding the importance of financial literacy and using the rich advice contained therein to seek financial independence. This is an aspect of life that is rarely delved into during the many years an individual may spend in the educational system (Kiyosaki 3). In most cases, it is only thinly discussed to the effect that it becomes negligible. Kiyosaki highlights that this is the major problem with the contemporary school system extrapolating, “My highly educated but poor dad struggled financially all his life. It was a singular point of view that made all the difference” (Kiyosaki 22). However, there is the implication that his biological father gained little from having an exceptionally long career as an educator as opposed to becoming an investor.

From a personal standpoint, there is more to life other than creating life. There are more rewards to a person’s inner self that can only be begotten from nurturing others. However, it is prudent to observe that Kiyosaki’s core purpose is to focus on how to ensure financial independence by appreciating that it is better to invest rather than to spend (Kiyosaki 33). At the same time, Kiyosaki underscores the importance of assets and the challenges associated resulting from the accrual of liabilities. In the instance that a father commits a child to the education system and ensures that they study and excel in their education; he has made a worthy investment. He can thus be proud of and more significantly presents a basis for financial independence for the young one. Conversely, where such an investment in education does not favor the child and they performs dismally, then this can be accounted for as a loss. Rather than committing funds to such an endeavor, it would be more worthwhile to equip that young person with on hands experiences that pave the way for robust financial literacy lessons. However, Kiyosaki fails to understand that some assets irrespective of their ability to generate cash flow are important.

Fear is the primary reason people are unable to reach the pinnacle of their life’s quest. Most people tend to have the wrong idea concerning what entrepreneurship entails. They believe that it is far better to work for a company rather than to own it. According to Kiyosaki, these are perceptions that breed from ignorance (37). Firstly, owning a business implies that a person is keen on learning how to be self-reliant. As stated in the book, a business owner will tend to engage in greater learning opportunities on how to optimize returns from investments (Kiyosaki 60). The cynical attitude by poor people who do not care to make investments towards financial independence is in essence the epitome of laziness. Poor persons are too slothful to consider that the greatest asset is time. Unfortunately, is nonrenewable in nature implying that the earlier one seeks to attain financial literacy the earlier they will begin earning the real benefits of creating and saving money as opposed to spending it. Kiyosaki fail to understand that there are employed people who have developed the art of investing in ventures that bring passive income and there are also businesspeople who never expand their businesses.

Many people consider their homes as a primary asset. Many people take up mortgages but as witnessed in the past financial recessions, they became massive liabilities (Kiyosaki 53). An asset is one that continuously earns money as opposed to demanding it. The rich dad lived a frugal life that ensured he did not commit continually committed less to paying for liabilities. In this way, the money he created did not go into paying for unnecessary bills but rather into more investments that ensured a growing passive income. Financial literacy is illustrated as a very straightforward understanding of how to create wealth without using it to things that do not add more wealth such as luxury goods (Kiyosaki 45). Borrowing to pay for liabilities is the greatest error that the poor make while the rich appreciate that learning new ways to make money is fundamental to making informed risks.

Works Cited

Kiyosaki, Robert T. Rich Dad, Poor Dad: What the Rich Teach Their Kids about Money -- that the Poor and Middle Class Do Not! Plata Publishing, 2014.

Lynch, Peter. Beating the Street. Simon and Schuster, 2012.