Rich Dad Poor Dad by Robert Kiyosaki

The poor and the middle class work for money. The rich have money work for them.  -- Rich Dad Poor Dad 

My good friends Jonathan and Cibie recommended that I read this book and I can't thank them enough for the recommendation.  This book presents the advice and wisdom from two Dads: one rich (whose views the author adopts) and one poor (his biological father).  This book could also be a story about Warren (me) and Adam (I changed his name to protect his identity).  Adam is a close family friend who is about 10 years older but grew up in the same city.   In this analogy I would be the poor Dad -- highly educated but trapped working for money.  Adam would be the rich Dad -- less educated but reaping the benefits of money working for him.

I work very hard for my salary from a large company in a very specialized role, which inadvertently puts me in a precarious situation -- during a recession or a decline in business I could be laid-off, and if the competition is not hiring I would be out of work and not making money for a long period of time.  Adam and the Rich Dad work hard, but for themselves and rely on their business intelligence to find and make deals that add to their net worth.  During a recession or a decline in business, they too will feel a pinch, but they have general business knowledge and the ability to pivot into different business ventures.  Both Adam and the Rich Dad protect against business cycles by entering business ventures that are fairly recession proof such as rental income from tenants.  In Adam's case, he owns properties close to major universities which he then rents to university students.  Adam expanded his Empire from those student houses to owning commercial real estate which he rents to businesses (restaurants, bars, etc...).  One property in particular has a monthly rent of over $10K.  So Adam's revenue from one property for one year is greater than my entire yearly salary, and he didn't have to go to any meetings at 7:30am!  I have long been a fan and admirer of Adam's business acumen and his ability to spot deals.  This book, Rich Dad Poor Dad, I think codifies Adam's business perspective and requires a shift in mind frame from a "working for money" to a "let money work for me".

Here are my highlights, notes and additional thoughts from the book (in sequential order of appearance):

1. It is not about how much you make but rather how much you keep.  For most people, expenses rise at about the same rate as their income so they get rich or poor at the same rate over time.  I have some friends who work in NYC who earn more money than I do but are accumulating wealth at a slower rate due to increase expenses.  
2. “There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.”  Some people are born broke but that is corrected as they amass their fortune over time.  Some people are born poor but remain poor all their life.  
3. “If you want to learn to work for money, then stay in school. That is a great place to learn to do that."  Schools generally prepare students to be employees and not employers.  The end goal of education for many people is to get a "good job".  So their ultimate goal is to become educated to help make someone else wealthy.  
4. "A job is only a short-term solution to a long-term problem."  The long term problem is the requirement for money or capital.  
5. "Rule #1: You must know the difference between an asset and a liability, and buy assets.... An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. This is really all you need to know."  This rule is astonishingly simple yet is overlooked by the majority of people.  I think your personal home is a liability since it takes money out of your pocket in the form of taxes, maintenance and utilities.  The only way people made money on their homes is through appreciation.  However, I think those days of consistent home appreciation are gone (actually the fact that it existed for one generation is something of an anomaly).  
6. “An intelligent person hires people who are more intelligent than he is.” 
7. "An important distinction is that rich people buy luxuries last, while the poor and middle class tend to buy luxuries first."  This trend is something I see all the time: retail therapy and big splurges.  People paying premium for luxury brands like Louis Vuitton and Armani.  I also have to admit that I fell into this trap early in my career: right out of university a bought the most expensive car I could afford (Subaru WRX) and it destroyed my finances until I finally sold it.  
8. "[Most people] spend their lives minding someone else’s business and making that person rich. To become financially secure, a person needs to mind their own business."  For example, I work to make the shareholders of my company wealthy and that is my career.  Conversely, my business to-date has been taking what little personal profit (earnings - expenses) and investing it into securities.  We are currently in the midst of a great bull run and a lot of the stocks are becoming priced way beyond their financials and future prospects warrant.  Thus, I know this bull market will end with a correction (as all bull markets do) but I am utterly uncertain when this will happen.  
9. "A corporation earns, spends everything it can, and is taxed on anything that is left. It’s one of the biggest legal tax loopholes that the rich use. They’re easy to set up and are not expensive if you own investments that are producing good cashflow."  The biggest difference between a corporation and a person is that a corporation is taxed on profit while people are taxed on revenue.  The author recommends reading Garret Sutton's book on corporations.  The author also described the utility of a 1031 tax-deferred exchange and setting up REITs.  The author uses a Nevada corporation to channel income from assets.  The other nice thing about a corporation, like an LLC, is that it limits liability. 
10. "Once we leave school, most of us know that it is not so much a matter of college degrees or good grades that count. In the real world outside of academics, something more than just grades is required. I have heard it called many things; guts, chutzpah, balls, audacity, bravado, cunning, daring, tenacity, and brilliance."  I think these are adjectives that are used after a venture proves to be successful but at the beginning of the venture with the outcome unknown I think the more common adjectives would be: foolish, unwise, risky, etc...  Starting a company or a new venture will always seem unwise or foolish to someone but as the old saying goes "Fortune favors the bold" and this leads nicely to the next point. 
11. "Winners are not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success. "  I will relay a story I read from Augustine's Laws: "...dropped out of grade school. Ran a country store. Went broke. Took 15 years to pay off his bills. Took a wife. Unhappy marriage. Ran for house. Lost twice. Ran for Senate. Lost twice. Delivered a speech that became a classic. Audience indifferent. Attacked daily by the press and despised by half the country. He signed his name A. Lincoln."  Failure is not in itself bad as long as you learn.  More telling than the actual failure is what happens afterward.  
12. "When it comes to money, the only skill most people know is to work hard. "  I am guilty of this thinking.  My own Father tells me all the time to work hard and that success and money will come.  I too think it is important to work hard and to have a good work ethic, but more importantly is to work intelligently.  Defaulting to working hard can cause people to overlook more efficient ways of accomplishing tasks.
13. "Rich dad explained to me that the hardest part of running a company is managing people."  I am not sure where I heard this story but this is what I remember: "How can you tell who is in charge?  Easy, he is the guy in the front with an arrow in his back."  Being a first level manager is a precarious position as you will have arrows come from both front (customers and upper level managers) and from behind (direct report employees who covet the position).  
14. "Listening is more important than talking."  This one is pretty self-explanatory.  Here is how I have thought of this: if I am talking, I am not listening; if I am not listening, I am not learning; If I am not learning, what is the point?  
15. "The three most important management skills necessary to start your own business are management of: 1. Cash flow 2. People 3. Personal time "
16. "Most sellers ask too much. It is rare that a seller asks a price that is less than something is worth."  This advice is justification with opening with a low bid. 
17. "Consumers will always be poor. When the supermarket has a sale, say on toilet paper, the consumer runs in and stocks up. But when the housing or stock market has a sale, most often called a crash or correction, the same consumer often runs away from it. "

This book was another Seldon moment in my life.  I have decided to return to my previous Spartan lifestyle and start building my own little empire.  This past week I had a 30 minute phone call with Adam and he gave me 5 years worth of advice. 

UPDATE: Startup Notes from Peter Thiel courtesy of Blake Masters

This blog by Blake Masters publishes essay versions of Peter Thiel's CS183: Startup class lectures from Stanford University.  Peter Thiel was the co-founder and CEO of PayPal and is now a managing partner of Founders Fund.  As of 2014, Mr. Thiel was ranked #4 on Forbes Midas List at $2.2 billion and holds a B.A. in Philosophy and a J.D. from Stanford.  As noted in the title, the lecture notes were transcribed and compiled by a student of the class (Blake Masters who also holds a J.D. from Stanford).   I think these notes will serve as the foundation of an upcoming book written by Peter Thiel with Blake Masters entitled "Zero to One - Notes on Startups, or How to Build the Future" due out on September 16th, 2014.  I plan on downloading this book to my Kindle when it comes out as I thoroughly enjoyed the notes Mr. Masters posted.  Here are my own abbreviated notes from having read through the entire course:

1. The title 0 to 1 comes from Peter Thiel's definition of technology development which is going from nothing to something, whereas 1 to n is essentially globalization (or driving down the marginal cost through volume: copying n times).  Mr. Thiel's primary thesis is that progress will come from intensive 0 to 1 technological solutions.  This line of reasoning culminates in Mr. Thiel's business credo of "What valuable company is nobody building?".  (class 1)
2. Startups should register as a Delaware C corporation (class 6)
3. A heuristic at Founders Fund is that a CEO of a startup should not be paid more than $150K/year.  Most of the CEO's compensation should come in the form of equity.  (class 6)
4. Equity for employees (non C-suite) should be vested over time: the standard is over 4 years: "with 25% vesting at a 1 year cliff, and then with 1/48th vesting each month for the 3 years after that." Equity for the founders should similarly vest over time with 20-25% vested as credit for work up to the first round of financing (class 6)
5. I found class 8 "The Pitch" the most informative:
• Pitch early in the day when people are fully awake and easier to engage
• Make propositions simple: problem + solution = money
• The CEO's job is pitching
• The pitch should be a story (not a formal ritualized pitch)
   and should be more showing and less telling
• Do not ask for an NDA from a VC but ask for one from job candidates
• The team is important (must answer why you?)
• Have a reasonable and thoughtful business plan/model even though it will certainly be a total work of fiction
• Have a clear ask (how much, what for, burn rate, valuation, etc...)
• When the deal closes immediately put out a press release and put the VCs on website 
• Immediately starting thinking about next round and next VC

6. Salespeople are required since products do not in fact sell by themselves (class 9)
7. Software needs to be the heart of the company which comes from Marc Andreesen's thesis "software is eating the world" (class 10)
8. Choose your enemies well because soon you'll become just like them (class 12)
9.  A single energy source typically dominates at any given time: wood, coal and perhaps soon natural gas (class 12)
10. China will become old before it becomes rich and its GDP growth and energy consumption are locked in 1:1 with no new improvements (class 12)
11. Global cleantech is ~420 GW and total global power generation is 15 000 GW (class 12)
12. Mr. Thiel is very bullish on Thorium fission nuclear reactors: non-weaponizable and costs about 1/10 of other nuclear forms (class 12) 
13. "If you want advice, ask for money.  If you want money, ask for advice" -- Peter Thiel (class 14)
14. Chief Operating Officer is code for the #1 replacement candidate for CEO (class 18)

I will close this post with the final paragraphs which I found particularly inspirational:

"There is perhaps no specific time that is necessarily right to start your company or start your life. But some times and some moments seem more auspicious than others. Now is such a moment. If we don’t take charge and usher in the future—if you don’t take charge of your life—there is the sense that no one else will.

So go find a frontier and go for it. Choose to do something important and different. Don’t be deterred by notions of luck, impossibility, or futility. Use your power to shape your own life and go and do new things. "

Addendum: here is another review of the same class notes from Business Insider.  Chapter 2 of the book can be seen here.

 

Space 2.0

This week Bloomberg posted the video below describing the new space race -- a race not between nation states but between companies.  The video features three companies: SpaceX, Boeing and Sierra Nevada.  The video was excellent but I thought they could have included Blue Origins and/or Aerojet Rocketdyne. 

I know a few people from my Purdue days working for SpaceX but my closest friends from Purdue ended up at Blue Origins.  Blue Origins is a very secretive space company that was founded by Amazon's Jeff Bezos.  If any of these companies can bring the price of space flight down by about a factor of 1000, I might have a chance of becoming a "space tourist".

Textbooks

During my university days I bought somewhere between 4-7 textbooks per semester.  I rarely cracked the cover of these expensive tomes.  Usually only opening them if there were assigned problems and sometimes to clarify the muddy points of lectures.  The price for acquiring these under-utilized and often esoteric tomes?  Around $6000 for my undergrad and another $2000 for grad school.  From this collection, I have 5 textbooks that are excellent and that I consult and reference on a somewhat regular basis and the other 50 or so textbooks are stored in milk crates.  So I have approximately a $6000 educational investment sitting in milk crates.

Now that I am done my formal education I read textbooks, but not the textbooks from my formal education.  I know, or rather think I know, that material.  I read textbooks for interest -- books on programming, machine learning and startups/entrepreneurship.

I am a big fan of Allen Downey's Think Series.  Allen Downey is a professor of computer science at Olin College and his primary teaching philosophy is that if you know how to program/code you can learn all sorts of things e.g. Bayesian Statistics.  Prof. Downey has authored a great Textbook Manifesto that states:

"Publishers: I don't know what to tell you. Your role in developing and distributing textbooks is no longer required." 

"Professors: choose books your students can read and understand."   

"Students: You should go on strike. If your textbook costs more than $50, don't buy it. If it has more than 500 pages, don't read it."

Prof. Downey further suggests that professors should assign no more than 10 pages of reading per week -- a  realistic and attainable goal.  I fully endorse Prof. Downey's Manifesto.  However, I think the medium of the textbook can also be improved.  Instead of static, non-interactive pdf documents we can now use IPython Notebook. As shown here for Aeropython and here for Bayesian Methods for Hackers.  These books are great and can be forked from GitHub. 

Prof. Lorena Barba, the author of Aeropython, has also written an interesting blog post about "flipping-the-classsroom".  The idea behind flipping-the-classroom is to have the lecture portion covered during homework and the homework exercises performed while in a class room setting.  Prof. Barba also laments that the typical student only retains about 20% of the covered material from a classical "sage on a stage" lecture-based  course.  However, she thinks, as I do, that by doing computational work and by allowing the students to "discover" the knowledge the students will retain more.

All this innovation in the education field almost makes me wish I did follow my bygone dream of becoming a Professor.  

Changing Curves

I recently subscribed to Scientific American and read a great article about the long slow rise of "modern" renewables like solar and wind power.  The author used the term modern renewables to exclude hydroelectricity, which has already been widely adopted and now faces limited growth (all the low hanging fruit has been snagged).  The figure below shows the adoption curves of different primary energy sources.  I added some data (source 1, source 2 and source 3) from IEA to fill out the curve for modern renewables.  The take-away from the figure below is that each subsequent transition from primary energy sources takes a long time and that adoption rates are slowing due to the entrenchment of incumbents and the expanding energy consumption.  The authors argue that the adoption rate of modern renewables can be increased by certain policies such as R&D funding, removal of subsidies and inclusion of economic externalities (include the price of environmental degradation).  The authors also envision a shift in energy infrastructure such that the current practice of placing a relatively small number of very large power plants "to a much greater number of small, distributed wind and solar systems." 

Most of my professional career I have been in an industry that either burns oil (Jet A) or natural gas.  I have recently had a few ideas that could help improve the efficiency of both wind turbines and solar panels.  Perhaps it is time to switch curves and help ratchet that last curve to a higher slope. 

The Best Books I Read in 2013

Stealing a page out of Bill Gates' playbook here, I am going to briefly review my top 5 books  that I read in 2013.

1. The Big Short by Michael Lewis  This was a New York Times' Bestseller in non-fiction in 2010.  This book traces the key players and events that created the credit default swaps (CDS) that were bets against the collateralized debt obligation (CDO) bubble.  The creation of the CDS allowed a few smart people to profit tremendously while the rest of the world was subsequently mired a deep recession.  Highlight: Michael Burry of Scion Capital, who was a trained as a medical doctor turned value investor, and was one of the few to profit from the CDO bubble.  Scion Capital under Burry posted returns of 489% compared to the S&P 500 return over the same period (Nov 2000 to June 2008) of just over two percent. 

2. Player Piano by Kurt Vonnegut  Inspired from his work at General Electric in which he observed a computer operated milling machine cut blades for gas turbines.  This book outlines a dystopian future of automation and the relegation of most of the human workforce to low value added manual labor.  This book explores the bifurcation of society between the haves (engineers and managers) and the have-nots (unskilled or lowly skilled workers).  Written in 1952 this book is very prescient of modern times: predicting the erosion of the middle class due to automation and the large gap between those who can design and engineer the automatons and those who can not.  Favourite quote: "At this point in history, 1952 A.D., our lives and freedom depend largely upon the skill and imagination and courage of our managers and engineers, and I hope that God will help them to help us all stay alive and free." Tip of the hat to Dr. Richard Parker for recommending this book.  

3. Cryptonomicon by Neal Stephenson Another Dr. Richard Parker recommendation.  This book is a long and nerdy book, so naturally I enjoyed it.  The book has two story-lines: the first story-line takes place around the events of WWII; and the second story-line is during the 1990's internet boom.  The WWII-era story-line traces the development of code-breaking and its mathematical foundation that is codified in the cryptographer's bible called the "Cryptonomicon".   The WWII-era story-line also follows the tactical-deception work of a marine raider.  During this story-line, fictional characters of the book often meet and converse with historical figures such as Alan Turing and Douglas MacArthur.  (Of the two story-lines, the WWII-era one was my favourite).  The second story-line, traces the grandson of the WWII-era protagonist as he and his company build a data haven for electronic banking and digital currency storage in the fictional Sultanate of Kinakuta. The book has a pretty good description of Van Eck phreaking, and has two tips-of-the-hat to Linux (called Finux in the book) and IBM (called ETC).  The non-technical reader might have some difficulty getting through some of the cryptography algorithms described.  

4. Civilization by Niall Ferguson  This was my first Niall Ferguson book.  I saw his TED talk before reading the book, so I had an idea of the "killer apps" he was going to present.  In the 14th century western civilization, as characterized by the Kingdom's of Europe, looked like they would forever remain petty and provincial, while Ming China and the Ottoman Empire would forge ahead into the civilizations of the future.  However, starting in the fifteenth century the west developed six killer apps that allowed it to leap ahead of the rest.  Now western civilization is losing its predominance due to other civilizations adopting the six killer apps: competition, science, the rule of law, consumerism, modern medicine and the protestant work ethic.  Favourite quote: "Capitalist competition has been disgraced by the recent financial crisis and the rampant greed of the bankers. Science is studied by too few of our children at school and university. Private property rights are repeatedly violated by governments that seem to have an insatiable appetite for taxing our incomes and our wealth and wasting a large portion of the proceeds... All we risk being left with are a vacuous consumer society and culture of relativism - a culture that says any theory or opinion, no matter how outlandish, is just as good as whatever it was we used to believe in."

5. The Lean Startup by Eric Ries  This book is pretty much mandatory reading these days at GE's Global Research Center due to the adoption of "Fastworks" - that is the codification and wholesale process adoption presented in this book.  The Lean Startup tries to apply the scientific method to business creation.  The goal of a lean startup is to test hypotheses in an effort to achieve "validated learning": that is demonstrating empirically valuable truths about a startup's present and future business prospects.  The book presents tools like the minimum viable product and cohort analysis to tests assumptions and hypotheses quickly and empirically.  This book and the creation of the "Fastworks" methodology is another step in realizing Jack Welch's dream of a small company feel with big company resources.  See here for a good overview and summary of the methodology.  

Honourable mention: Foundation Series by Isaac Asimov I read the first two books in the series: Foundation and Foundation and Empire.  I could hardly put them down.  Friends have urged me to read these for years and all I can say is that I should have read them sooner.  Reading these was a Seldon event in my reading life.