Instructor
Course
Date
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.
